Hostname: page-component-54dcc4c588-tfzs5 Total loading time: 0 Render date: 2025-09-30T11:45:43.170Z Has data issue: false hasContentIssue false
  • English
  • Français

Standard Errors in Event Studies

Published online by Cambridge University Press:  06 April 2009

Michael Salinger
Get access Rights & Permissions [Opens in a new window]

Abstract

Even if true abnormal returns are uncorrelated, estimated abnormal returns are not. This paper presents a simple formula for the variance of estimated cumulative abnormal returns. Both returns and dummy variable procedures for estimating the standard error correctly, taking account of both intertemporal and contemporaneous correlation of estimated residuals, are discussed. They are then applied to an event study of post-merger performance. It is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 39 - 53
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Asquith, P. “Merger Bids, Uncertainty, and Stockholder Returns.” Journal of Financial Economics, 11 (04 1983), 51–83.CrossRefGoogle Scholar
Beale, E. M. L., and Little, R. J. A.. “Missing Values in Multivariate Analysis.” Journal of the Royal Statistical Society, B37 (1975), 129–145.Google Scholar
Binder, J. “Measuring the Effects of Regulation with Stock Price Data.” Rand Journal of Economics, 16 (Summer 1985a), 167–183.CrossRefGoogle Scholar
Binder, J. “On the Use of the Multivariate Regression Model in Event Studies.” Journal of Accounting Research, 23 (Spring 1985b), 21–36.CrossRefGoogle Scholar
Binder, J. “The Sherman Antitrust Act and the Railroad Cartels.” Journal of Law and Economics, 31 (10. 1988), 443–68.CrossRefGoogle Scholar
Buck, S. F. “A Method of Estimation of Missing Values in Multivariate Data Suitable for Use in an Electronic Computer.” Journal of the Royal Statistical Society, B22 (1960), 302–306.Google Scholar
Cantrell, S.; Maloney, M.; and Mitchell, M.. “On Estimating the Variance of Abnormal Stock Market Performance.” Unpubl. Manuscript (1989).Google Scholar
Gibbons, M. “Econometric Models for Testing a Class of Financial Models: An Application of the Nonlinear Multivariate Regression Model.” Unpubl. Manuscript, Univ. of Chicago (1980).Google Scholar
Jaffe, J. F. “Special Information and Insider Trading.” The Journal of Business, 47 (07 1974), 410–428.CrossRefGoogle Scholar
Karafiath, I., and Spencer, D.. “Statistical Inference in Multiperiod Event Studies.” Review of Quantitative Finance and Accounting, 1 (12. 1991), 353–371.CrossRefGoogle Scholar
Langetieg, T. “An Application of a Three-Factor Performance Index to Measure Stockholder Gains from Merger.” Journal of Financial Economics, 4 (12. 1978), 365–383.CrossRefGoogle Scholar
Little, R. J. A., and Rubin, D. B.. Statistical Analysis with Missing Data. Wiley: New York (1987).Google Scholar
Magenheim, E., and Mueller, D.. “On Measuring the Effect of Mergers on Acquiring Firm Shareholders.” In Knights, Raiders and Targets: The Impact of Hostile Takeover, Coffee, J. et al. , eds. London: Oxford Univ. Press (1989), 171–193.Google Scholar
Malatesta, P. “The Wealth Effect of Merger Activity and the Objective Functions of Merging Firms.” Journal of Financial Economics, 11 (04 1983), 155–181.CrossRefGoogle Scholar
Malatesta, P. “Measuring Abnormal Performance: The Event Approach Using Joint Generalized Least Squares.” Journal of Financial and Quantitative Analysis, 21 (03 1986), 27–38.CrossRefGoogle Scholar
Mandelker, G. “Risk and Return: The Case of Merging Firms.” Journal of Financial Economics, 1 (12. 1974), 303–336.CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “Withdrawn Security Offerings.” Journal of Financial and Quantitative Analysis, 23 (06 1988), 119–133.CrossRefGoogle Scholar
Neter, J., and Wasserman, W.. Applied Linear Statistical Models. Homewood, IL: Irwin (1974).Google Scholar
Newey, W, and West, K.. “A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (05 1987), 703–709.CrossRefGoogle Scholar
Pindyck, R., and Rubinfeld, D.. Econometric Models & Econometric Forecasts, 2nd Edition. New York: Mc Graw-Hill (1981).Google Scholar
Rose, N. “The Incidence of Regulatory Rents in the Motor Carrier Industry.” Rand Journal of Economics, 16 (Autumn 1985), 299–318.CrossRefGoogle Scholar
Salinger, M. “Standard Errors in Event Studies.” Unpubl. Manuscript (03 1989).Google Scholar
Salinger, M. “Value Event Studies.” Review of Economics and Statistics (forthcoming).Google Scholar
Schipper, K., and Thompson, R.. “The Impact of Merger-Related Regulations on the Shareholders of Acquiring Firms.” Journal of Accounting Research, 21 (Summer 1983), 184–221.CrossRefGoogle Scholar
Smith, R. T.; Bradley, M.; and Jarrell, G.. “Studying Firm-Specific Effects on Regulation with Stock Market Data: An Application to Oil Price Regulation.” Rand Journal of Economics, 17 (Winter 1986), 467–89.CrossRefGoogle Scholar
Sweeney, R. “Levels of Significance in Event Studies.” Unpubl. Manuscript (1989).Google Scholar
Warga, A. “Bond Returns, Liquidity, and Missing Data.” Unpubl. Manuscript (1989).Google Scholar