Future Long-Horizon Performance Measurement Conditional on Past Survival
Monash University - Department of Accounting and Finance; Financial Research Network (FIRN)
University of Queensland - Business School
International Review of Finance, Vol. 4, No. 1-2, pp. 29-48, March 2003
This paper examines the measurement of long-horizon abnormal performance when stock selection is conditional on an extended period of past survival. Filtering on survival results in a sample driven towards more-established, frequently traded stocks and this has implications for the choice of benchmark used in performance measurement (especially in the presence of the well-documented size effect). A simulation study is conducted to document the properties of commonly employed performance measures conditional on past survival. The results suggest that the popular index benchmarks used in long-horizon event studies are severely biased and yield test statistics that are badly misspecified. In contrast, a matched-stock benchmark based on size and industry performs consistently well. Also, an eligible-stock index designed to mitigate the influence of the size effect proves effective.
Number of Pages in PDF File: 20Accepted Paper Series
Date posted: July 18, 2005
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