On Long-Run Stock Returns after Corporate Events

Forthcoming, Critical Finance Review

Mays Business School Research Paper No. 2616693

52 Pages Posted: 12 Jun 2015 Last revised: 10 May 2017

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Ahmet M. Tuncez

Adrian College

Date Written: May 8, 2017

Abstract

Bessembinder and Zhang (2013) show that long-run abnormal returns after major corporate events detected by the BHAR method using size and book-to-market matched control stocks can be explained by differences between event and control stocks' unsystematic and systematic characteristics. We find that their results are mainly driven by the normalization of firm characteristics, which was intended to make estimated regression coefficients comparable. Unfortunately, their normalization procedure implies incremental non-linearity and randomizes regression relations. These effects influence the slope coefficients, potentially bias alpha, and materially inflate its standard error, which causes even economically large alpha estimates to be insignificant. Revisiting their regression analyses shows that, even though the event firms and their controls differ in terms of various characteristics, these differences do not generally eliminate abnormal returns as measured by alphas.

Keywords: Abnormal return, Long-run event study, Characteristic normalization, Merger and acquisition, IPO, SEO, Dividend initiation

JEL Classification: C10, G14 ,G32, G34, G35

Suggested Citation

Kolari, James W. and Pynnonen, Seppo and Tuncez, Ahmet M., On Long-Run Stock Returns after Corporate Events (May 8, 2017). Forthcoming, Critical Finance Review; Mays Business School Research Paper No. 2616693. Available at SSRN: https://ssrn.com/abstract=2616693 or http://dx.doi.org/10.2139/ssrn.2616693

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics ( email )

Wolffintie 34
65200 Vaasa
Finland
+358-21-449 8311 (Phone)

HOME PAGE: http://www.uva.fi/~sjp/

Ahmet M. Tuncez

Adrian College ( email )

110 S. Madison
Adrian, MI 49221
United States

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