Future Long‐Horizon Performance Measurement Conditional on Past Survival*

Philip Gray and Mark Whittaker

International Review of Finance, 2003, vol. 4, issue 1‐2, 29-48

Abstract: This paper examines the measurement of long‐horizon abnormal performance when stock selection is conditional on an extended period of past survival. Filtering on survival results in a sample driven towards more‐established, frequently traded stocks and this has implications for the choice of benchmark used in performance measurement (especially in the presence of the well‐documented size effect). A simulation study is conducted to document the properties of commonly employed performance measures conditional on past survival. The results suggest that the popular index benchmarks used in long‐horizon event studies are severely biased and yield test statistics that are badly misspecified. In contrast, a matched‐stock benchmark based on size and industry performs consistently well. Also, an eligible‐stock index designed to mitigate the influence of the size effect proves effective.

Date: 2003
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