PAM_334_Fall_2008_Lecture_15

PAM_334_Fall_2008_Lecture_15 - PAM3340 Lecture15...

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PAM 3340 Lecture 15 Announcements: Prelim #2 next Tuesday Agenda: Event study method Role of board Combining CEO/Chairman role
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Measuring Effects: Event- Study Method Stock Returns: The Case of Event Studies,”  J. of Financial Economics  Vol. 14 (1985) r i  =  α i  +  β R m  +  γ R x  +  ε r i  = change in firm  i ’s stock (returns) α i  = firm-specific intercept R m  = change in (returns on) the market  portfolio (S&P 500)
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Measuring Effects: Event- Study Method (con’t) R x  = change in (returns on) the industry  portfolio β  = co-variance between firm  i ’s stock  and the market portfolio γ  = co-variance between the industry  portfolio and firm  i ’s stock ε  = residual or error term
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Measuring Effects: Event- Study Method (con’t) If the residual or error is zero the firm is  just earning a  normal return The error term reflects the effect of firm- specific news on that firm’s stock price Sometimes called the “abnormal return”
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Michael C. Jensen and Richard S.  Ruback, “The Market for Corporate  Control: The Scientific Evidence,” 11  Journal of Financial Economics  1983, 5- 50. Provides a “meta-study” of abnormal 
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This document was uploaded on 10/26/2011 for the course PAM 3340 at Cornell.

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PAM_334_Fall_2008_Lecture_15 - PAM3340 Lecture15...

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