A rapidly growing literature claims to reject the efficient market hypothesis by producing large estimates of long-term abnormal returns following major corporate events. The preferred methodology in this literature is to calculate average multi-year buy-and-hold abnormal returns and conduct inferences via a bootstrapping procedure. We show that this methodology is severely flawed because it assumes independence of multi-year abnormal returns for event firms, producing test statistics that are up to four times too large. After accounting for the positive cross-correlations of event firm abnormal returns we find virtually no evidence of reliable abnormal performance for our samples.

Statistical inference in long-horizon event studies has been hampered by the fact that abnormal returns are neither normally distributed nor independent. This study presents a new approach to inference that overcomes these difficulties and dominates other popular testing methods. I illustrate the use of the methodology by examining the long-horizon returns of initial public offerings ~IPOs!. I find that the Fama and French ~1993! three-factor model is inconsistent with the observed long-horizon price performance of these IPOs, whereas a characteristic-based model cannot be rejected. RECENT EMPIRICAL STUDIES IN FINANCE document systematic long-run abnormal price reactions subsequent to numerous corporate activities. 1 Since these results imply that stock prices react with a long delay to publicly available information, they appear to be at odds with the Efficient Markets Hypothesis ~EMH!. Long-run event studies, however, are subject to serious statistical difficulties

This paper uses firm-level information to examine how the Asian and Russian crises affected different types of firms around the world. It constructs a new data set of financial statistics, industry information, geographic data, and stock returns for over 10,000 companies in 46 countries. Results indicate that firms that competed with exports from the crisis countries, and firms which had direct sales exposure to the crisis countries, had substantially lower abnormal stock returns during these periods. On the other hand, firms with higher debt ratios did not experience significantly lower abnormal returns. Country-specific effects, although important determinants of company stock returns, generally have a smaller impact than the firm-specific characteristics. This series of results suggests that trade channels are important determinants of how crises are transmitted internationally.

This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on firms

The authors use stock return data to investigate the effects of the First Executive (FE) failure on other life insurance firms. In contrast to previous studies, they explicitly test for the separate effects of individual (retail) and

We examine the impact of the Sarbanes-Oxley Act (SOX) of 2002 on firms with securities cross-listed on U.S. exchanges in order to (i) test the importance of the legal bonding motive for cross-listing into the U.S. market and (ii) measure the benefits and costs of SOX. The two research questions are interrelated, because a potential benefit of SOX is to increase the extent of legal bonding from a U.S. listing. We exploit SOX being an exogenous change in investor protection for cross-listed firms, which allows us to overcome self-selection issues that have made it difficult for prior research to answer our research questions. Finally, we combine event study evidence from around the time of SOX’s passage with evidence about multiple real changes in behavior between the pre- and post-SOX periods in order to reduce the possibility of incorrectly attributing results to the passage of SOX that could instead be associated with other contemporaneous events. Our event study evidence indicates that SOX’s costs exceed its benefits for cross-listed firms, but that incremental legal bonding does provide a benefit. Our real changes evidence supports the existence of an incremental legal bonding benefit of SOX that substitutes for external monitoring by parties such as institutional blockholders. One cost of

this article, we also use results from the literature on limited dependent variables to derive consistent estimators in event studies. However, we focus on the coefficients of cross-sectional regressions for an event that satisfies the maintained hypotheses in models of limited dependent variables. These cross-sectional estimators measure the magnitude of abnormal stock returns around the announcement of a voluntary economic event in the presence of truncation bias. The estimators are then applied to a model of horizontal mergers. The application has been selected for three reasons. First, mergers are plausibly both discrete and nonrepetitive events, and corporate insiders can reasonably be assumed to maximize their stock's true value, conditional on their private information, rather than its market value, as determined by public information

In October of 2002, the Simon Property Group made a hostile takeover bid for Taubman Centers, a bid that the financial press widely reported as the first significant hostile takeover attempt in the U.S. REIT industry. As such, this event provides a natural experiment for estimating the value of the market for corporate control, one of the primary corporate governance mechanisms by which the market ensures that firm managers maximize shareholder value. Contrary to our expectations, we find no significant industry price reaction in response to this announcement, strong evidence that this event did not mark the introduction of a market for corporate control into the REIT industry. We argue that REIT anti-takeover provisions had doomed Simon’s bid from the start and continue to preclude operation of a market for corporate control. However, we do find that Taubman’s shares responded favorably to the announcement, rising by 12 percent on the announcement day. We attribute this to operation of the market for partial corporate control as described by Bethel, Leibeskind and Opler (1998).

Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation. 1

Many allege that the accounting profession has failed to adapt to fundamental changes in the business environment because it has not developed timely guidance for reporting intangible assets. Regulatory attention has also focused on the disclosure companies make with respect to intangible assets. Accounting for the value of intangible assets acquired in a merger transaction is a key component of this issue. This research examines the stock-price reaction of three industry groups that are R&D intensive (computer software, computer hardware, and biotechnology) to proposed changes in accounting for acquired in-process research and development (IPR&D). We test the average reaction to events that indicate a potential regulatory change in accounting for IPR&D. The results show that the stock prices of firms in R&D intensive industries react negatively, on average, to events that increase the probability of the SEC adopting rules restricting IPR&D charges or that increase the expected degree of SEC scrutiny of the charges. The results support the theory that investors perceive limitations in reporting