Detecting long-run abnormal stock returns: The empirical power and specification of test statistics

We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (em...

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Bibliographic Details
Published in:Journal of financial economics 1997-03, Vol.43 (3), p.341-372
Main Authors: Barber, Brad M., Lyon, John D.
Format: Article
Language:English
Subjects:
Bias
Book value
Book-to-market ratios
Comparative studies
Economic theory
Event studies
Financial economics
Firm size
Market value
Sampling
Size of enterprise
Statistical methods
Statistics
Stock prices
Stock returns
Stocks
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Summary:We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(96)00890-2