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Consistent Estimation of Cross-Sectional Models in Event Studies

30 Pages Posted: 12 Nov 2008  

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Joseph Williams

University of British Columbia (UBC) - Sauder School of Business

Date Written: 1990

Abstract

Event studies often include cross-sectional regressions of announcement effects on exogenous variables. If the event is voluntary and investors are rational, then standard OLS and GLS estimators are inconsistent. Consistent ML estimators are constructed for a cross-sectional model of horizontal mergers relating announcement effects to exogenous characteristics of firms and industries. The OLS and ML estimates differ dramatically for bidders but not for targets. The evidence suggests that managers of bidders, but not targets, have valuable private information about the potential synergies from proposed mergers.

Keywords: Event studies, voluntary events, consistent estimation, selection bias, OLS, GLS, ML estimation, nonlinear estimator, synergy gains, horizontal mergers, bidder gains

JEL Classification: C1, C13, C2, C21, C25, G3, G34

Suggested Citation

Eckbo, B. Espen and Maksimovic, Vojislav and Williams , Joseph, Consistent Estimation of Cross-Sectional Models in Event Studies (1990). Review of Financial Studies, Vol. 3, pp. 343-365, 1990. Available at SSRN: https://ssrn.com/abstract=1299820

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

Joseph Williams

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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