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Event methodology - Early event studies assumed that stock...

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Early event studies assumed that stock markets are efficient, in which case the change in the stock market value of a company due to an event gives an unbiased estimate of the value relevance of the event. It’s also something that’s immediately observable. In contrast, trying to gauge - the effect of an event on a company’s future accounting profits takes much longer and it’s difficult to isolate the effect of the particular event. An event study makes it easier to isolate the effect of the event. Taking the example of a takeover bid, an information content or value relevance test might examine the stock price reaction from x days or months before the announcement to one or two days or months after. The number x depends on how far in advance of the bid announcement it’s reasonable to assume the stock market anticipates the bid 1 (and also on whether we’re using daily or monthly data). If the market is informationally efficient, stock prices should react fully to announcements when they occur. This is the rationale for an information content event study: to
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