Event Study Testing with Cross-Sectional Correlation of Abnormal Returns
Review of Financial Studies,Vol. 23, No. 11, pp. 3996-4025, 2010
Posted: 4 May 2011
Date Written: November 2010
This article examines the issue of cross-sectional correlation in event studies. When there is event-date clustering, we find that even relatively low cross-correlation among abnormal returns is serious in terms of over-rejecting the null hypothesis of zero average abnormal returns.We propose a new test statistic that modifies the t-statistic of Boehmer, Musumeci, and Poulsen (1991) to take into account cross-correlation and show that it performs well in competition with others, including the portfolio approach, which is less powerful than other alternatives under study. Also, our statistic is readily use-able to test multiple-day cumulative abnormal returns.
Keywords: event studies, cross-correlation, abnormal returns, event-date clustering
JEL Classification: G14, C10, C15
Suggested Citation: Suggested Citation