EXTENSIONS OF THE STANDARDIZED CROSS‐SECTIONAL APPROACH TO SHORT‐HORIZON EVENT STUDIES

Ronald Bremer and Zhaohui Zhang

Journal of Financial Research, 2007, vol. 30, issue 4, 495-513

Abstract: Strong evidence indicates that short‐horizon event‐induced abnormal returns and volatility vary significantly over event days. Event‐study methods that assume constant event‐induced abnormal returns and volatility over event days have potentially inflated Type I error rates and poor test power. Our simple extensions of the Boehmer, Musumeci, and Poulsen (1991) approach scale abnormal returns with conditional variance, which is estimated with GARCH(1,1) and an indicator of the event in a two‐stage estimation. Our method improves the Boehmer, Musumeci, and Poulsen approach on model specification and test power, even under challenging event‐induced mean and volatility structures, and could standardize short‐horizon event studies.

Date: 2007
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