Holding Size While Improving Power in Tests of Long-Run Abnormal Stock Returns

35 Pages Posted: 2 Dec 1996

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Richard Lyon

affiliation not provided to SSRN

Chih-Ling Tsai

University of California, Davis - Graduate School of Management

Date Written: October 1996

Abstract

Barber and Lyon (1996a) and Kothari and Warner (1996) document conventional tests of long-run abnormal returns are misspecified. In this research, we propose alternative methods to test for long-run abnormal returns. Our methods have two key characteristics. First, long-run abnormal returns are calculated using reference portfolios that yield an abnormal return measure with a population mean that is identically zero. Second, our methods control for the documented positive skewness in long-run abnormal returns calculated using reference portfolios. We control for the positive skewness by either (1) adjusting conventional t statistics using well-documented statistical methods, or (2) generating the empirical distribution of mean long-run abnormal returns via simulation. In addition to yielding reasonably well-specified test statistics in a variety of sampling situations, we document that these two methods are more powerful than the control firm approach analyzed by Barber and Lyon.

JEL Classification: G10

Suggested Citation

Barber, Brad M. and Lyon, Richard and Tsai, Chih-Ling, Holding Size While Improving Power in Tests of Long-Run Abnormal Stock Returns (October 1996). Available at SSRN: https://ssrn.com/abstract=1278 or http://dx.doi.org/10.2139/ssrn.1278

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Richard Lyon (Contact Author)

affiliation not provided to SSRN

Chih-Ling Tsai

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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