On Long-Run Stock Returns after Corporate Events

Bessembinder and Zhang (2013) show that long-run abnormal returns after major corporate events detected by the BHAR method using size and book-to-market matched control stocks can be explained by differences between event and control stocks' unsystematic and systematic characteristics. We find that their results are mainly driven by the normalization of firm characteristics, which was intended to make estimated regression coefficients comparable. Unfortunately, their normalization procedure implies incremental non-linearity and randomizes regression relations. These effects influence the slope coefficients, potentially bias alpha, and materially inflate its standard error, which causes even economically large alpha estimates to be insignificant. Revisiting their regression analyses shows that, even though the event firms and their controls differ in terms of various characteristics, these differences do not generally eliminate abnormal returns as measured by alphas.

Keywords: Abnormal return, Long-run event study, Characteristic normalization, Merger and acquisition, IPO, SEO, Dividend initiation

JEL Classification: C10, G14 ,G32, G34, G35

Suggested Citation: Suggested Citation

Kolari, James W. and Pynnonen, Seppo and Tuncez, Ahmet M., On Long-Run Stock Returns after Corporate Events (May 8, 2017). Forthcoming, Critical Finance Review, Mays Business School Research Paper No. 2616693, Available at SSRN: https://ssrn.com/abstract=2616693 or http://dx.doi.org/10.2139/ssrn.2616693