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A new approach in event studies: Time varied analysis

This study proposes a modified market model of event study that takes into account the asynchronous behavior between individual stocks and the stock market by using an added Chebyshev polynomial term. The proposed model takes into account both the macro market performance and the micro individual stock behavior and is empirically tested. | http afr. sciedupress.com Accounting and Finance Research Vol. 8 No. 3 2019 A New Approach in Event Studies Time Varied Analysis Yi Ren1 Dong Xiao2 department of Accounting Illinois State University Normal IL USA department of Statistics North Carolina State University Raleigh NC USA Correspondence Yi Ren PhD Department of Accounting Illinois State University USA Received July 12 2019 Accepted August 13 2019 Online Published August 19 2019 doi 10.5430 afr.v8n3p176 URL https doi.org 10.5430 afr.v8n3p176 Abstract This study proposes a modified market model of event study that takes into account the asynchronous behavior between individual stocks and the stock market by using an added Chebyshev polynomial term. The proposed model takes into account both the macro market performance and the micro individual stock behavior and is empirically tested. The empirical analysis results demonstrate that the proposed model improves the explanatory power of the model as well as the heteroskedasticity. More importantly its performance is almost independent of the choice of the events and stocks. Keywords event studies time-related market model Chebyshev polynomials 1. Introduction Since the publication of two papers by Ball and Brown 1968 and Fama et al. 1969 event studies have become very popular in accounting and finance research. As noted by Kothari and Warner 2007 a number of event studies have been published and the literature continues to grow. The majority of event studies are focused on estimations of the impacts of unanticipated events on stock prices. The studies include stock reactions to stock splits e.g. Fama Fisher Jensen and Roll 1969 Grinblatt Masulis and Titman 1984 McNichols and Dravid 1990 Louis and Robinson 2005 Baker et al 2009 effects of earnings announcements and dividends e.g. Foster Olsen and Shevlin 1984 Brown and Warner 1985 MacKinlay 1997 investigations of merger and acquisition events e.g. Eckbo 1983 Jarrell and Poulsen 1989 Kothari and warner 2007 .