Bias-Corrected Estimation of Price Impact in Securities Litigation
25 Pages Posted: 24 Jul 2017 Last revised: 29 Sep 2017
Date Written: September 27, 2017
Securities litigants use single-firm event studies to detect the impact of an event such as a corrective disclosure on the price of a traded security. Because a study of a single event cannot average away confounding effects, statistically significant estimates of price impact are biased. This means that price impacts in single-firm event studies are systematically overestimated, a problem that carries over into damages calculations and results in securities litigation being settled or decided for excessive damages. We quantify and examine the bias using the empirical distribution of daily stock returns, and develop bias-corrected estimators of price impacts for single-event studies.
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