Valid Inference in Single-Firm, Single-Event Studies

Abstract

Single-firm event studies play an important role in both scholarship and litigation despite the general invalidity of standard inference. We use a broad cross-section of 2000-2007 CRSP data and find that the standard approach performs poorly in terms of both Type I and Type II error rates. We discuss a simple-to-use alternative, the SQ test, based on sample quantiles of the empirical distribution of pre-event fitted excess returns, which has correct asymptotic Type I error rate. Results suggest the test will be useful in studying the impact of firm-specific events such as regulation, anti-trust rulings, and corporate or securities litigation.

Keywords: event study, sample quantiles, abnormal return, bootstrap, non-parametric, securities litigation

JEL Classification: C12, C14, G00, G14, K00, K22