Interacting Biases, Non-Normal Return Distributions and the Performance of Tests for Long-Horizon Event Studies

Journal of Banking & Finance

Posted: 25 Apr 2000

Abstract

We report simulations, using actual stock return data, of statistical tests of long-horizon buy-and-hold stock returns. We use benchmark portfolios purged of new-listings and rebalancing biases, and find that many proposed tests are misspecified, due in part to skewness. The use of a single control firm instead of a portfolio still produces misspecification, particularly in large samples. We document an inverse relation between skewness bias and sample size, and also document an overlapping-horizons bias. Both biases worsen as the holding period lengthens. Due to interacting biases, tests can be well-specified in one testing scenario but not another, seeming similar, one. A two groups test applied to winsorized abnormal returns exhibits correct specification and considerable power most often in among the tests simulated.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: G12, G14, G30, M41, C24

Suggested Citation

Cowan, Arnold R. and Sergeant, Anne M., Interacting Biases, Non-Normal Return Distributions and the Performance of Tests for Long-Horizon Event Studies. Journal of Banking & Finance, Available at SSRN: https://ssrn.com/abstract=216456

Arnold R. Cowan (Contact Author)

Iowa State University ( email )

College of Business
3344 Gerdin Business Building
Ames, IA 50011-1350
United States

HOME PAGE: http://www.bus.iastate.edu/arnie

Anne M. Sergeant

Iowa State University ( email )

College of Business
Ames, IA 50011-2063
United States
515-294-2204 (Phone)
515-294-6060 (Fax)

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