Over-Interpretation of Short-Window Event Study Findings in Management Research: An Empirical Illustration
35 Pages Posted: 2 Aug 2006
Date Written: May 8, 2007
Event studies continue to be popular in the management literature. Most management researchers use event studies with a short window, and assume that the market's initial reaction reflects the economic impact of the event in an unbiased manner. This assumption is based on the efficient markets hypothesis (EMH): that security prices at any time fully reflect available information. This assumption likely holds in many settings, but we argue that when the information revealed to the market is complex or otherwise difficult to interpret, the initial market response may be biased or incomplete. In these settings, results from short-window event studies may not completely capture the economic impact of the event. We briefly review prior work on this issue, drawing from finance and accounting as well as from management research, and provide an example to support our argument using a large sample of horizontal acquisitions.
Keywords: Event Studies, Mergers, Acquisitions, Market Efficiency
JEL Classification: G12, G14, G15, G35, M41
Suggested Citation: Suggested Citation