1. Advanced Corporate Finance Finance Masters
Warwick Business School
SEMINAR WEEK 4 ON EVENT STUDY METHODOLOGY
We are going to check target stock price reaction to announcements of takeover offers
announced over 1999 for all firms listed on the New York Stock Exchange (with bidders
listed on NYSE as well). The deal information is downloaded from Thomson ONE Banker
(you have access via the university library). The total return index was downloaded from
CRSP (via Wharton data).
We will use the event study methodology with the market model as a benchmark:
ˆ (1)
ARi ,t  Ri ,t  ( i   i RM ,t )
ˆ
The event date is the announcement of an initial offer. The event window is -5 to +5 days
around the announcement date and the estimation window for estimating α and β is from
t = -180 to t = -60.
Over the estimation window of -180 to -60, we need to estimate α and β in a regression:
Ri ,t   i   i * RM ,t   i ,t
Once we have the estimates of α and β, we can compute the abnormal returns for each
event from (1).
Usually, we are interested in the average market reaction – we use the function AVERAGE
in Excel. Moreover, we want to know whether the average abnormal return is statistically
different from zero. We can use a t-test of the following form:
AAR t
G
s/ N
where AARt is the average abnormal return, N is the total number of events and s is the
cross-sectional standard deviation of the abnormal returns (we can estimate it using the
STDEV function in Excel).
Cumulative abnormal returns over t1 till t2 are computed as the sum of abnormal returns
over this period. The t-statistic can be computed as follows:
CAAR t
G
sCAR  / N
where s(CAR) is the cross-sectional standard deviation of the cumulative abnormal returns.