SEvent(28p) - Event Studies Econometric models to determine the effect of an event on shareholder wealth Event Studies We use these to study the

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Unformatted text preview: Event Studies Econometric models to determine the effect of an event on shareholder wealth Event Studies We use these to study the effect of some exogenous shock on wealth in the economy. Merger announcement The idea is that some exogenous shock comes along and the value of the firm changes. Events and M&A activity Evaluating mergers: If on average, the value of the bidder and target firm increases, then mergers are a good idea. So, we could just look at the effect of the merger announcement the day the merger is decided upon. But lots of things affecting a stock happen daily. How can we know that the change in stock price is due to the merger announcement. But how do we differentiate between a good stock market and a good merger idea. In fact, if the market goes up, on average, then shouldn’t stock prices increase on any particular day? There is a historical ‘run-up’ in target stocks in the few days and weeks before the announcement of a merger. Why? Separating the wheat from the chaff Stock prices fluctuate. What’s it called What causes it Why does this matter for an event study? What to do about it? Compare stock price the moment before an event with the price the moment after. An Event What happened? Reaction of Stock Price to New Information in Efficient and Inefficient Markets Stock Price Days before (+) and after (-) announcement –30 –20 –10 +10 +20 +30 Overreaction and reversion Delayed response Efficient-market response to new information Three Forms of Market Efficient Hypothesis Weak Form Efficient Market Prices reflect information set of past prices Random Walk Semi-strong Form Efficient Market Prices reflect publicly available information Strong Form Efficient Market Prices reflect all information relevant to a stock Relationship among Three Different Information Sets...
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This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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SEvent(28p) - Event Studies Econometric models to determine the effect of an event on shareholder wealth Event Studies We use these to study the

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