Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics
Posted: 26 Aug 1999
Date Written: July 1994
Many recent studies have analyzed the impact that corporate events or managerial decisions have on operating performance. In these studies, researchers face many methodological choices. This paper analyzes the effect that three dimensions of choice have on the specification and power of test-statistics designed to detect abnormal operating performance: (1) the selection of a performance measures (e.g. return on assets or return on sales), (2) the selection of a statistical test (e.g., parametric t-statistic or non-parametric Wilcoxon T*), and (3) the selection of a performance benchmark (where we evaluate nine different performance benchmarks). On the first two dimensions (choice of performance measures and statistical test) we generally find little difference in the specification and power of test-statistics. However, on the third dimension (choice of performance benchmark), only one benchmark -- matching sample firms to firms with the same two-digit SIC code and similar past performance -- is well-specified. In the conclusion, we provide specific recommendations about the choice of performance measure, test-statistic, and benchmark.
JEL Classification: G30
Suggested Citation: Suggested Citation