Characteristic-Based Benchmark Returns and Corporate Events
Forthcoming, Review of Financial Studies
104 Pages Posted: 12 Sep 2015 Last revised: 7 Mar 2018
Date Written: March 5, 2018
We propose that fitted values from market-wide regressions of firm returns on lagged firm characteristics provide useful benchmarks for assessing whether average returns to certain stocks are abnormal. To illustrate, we study eight events where abnormal returns have been documented, including credit rating and analyst recommendation downgrades, initial and seasoned public equity offerings, mergers and acquisitions, dividend initiations, share repurchases and stock splits. We show that the apparently abnormal returns in the months after these events are substantially reduced or eliminated when compared to characteristic-based benchmarks. Characteristic-based benchmarks perform better in explaining post-event returns than recent four and five-factor models.
Keywords: abnormal returns after corporate events, predicted returns, firm characteristics
JEL Classification: G14; G30
Suggested Citation: Suggested Citation