Measuring Long-Horizon Security Price Performance

Working Paper FR 95-19

Posted: 1 Jul 1998

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jerold B. Warner

University of Rochester – Simon Business School

Date Written: October 1995

Abstract

This paper studies the specification of tests for long-horizon (i.e., multiyear) abnormal security returns around firm-specific events, using samples of randomly selected securities and simulated event dates. The main result is that typical long-horizon tests are misspecified. The tests have a severe tendency to indicate abnormal performance when none is present, with rejection frequencies sometimes exceeding 5 to 10 times the significance level of the test. The result is not sensitive to the specific model used for estimating abnormal returns. The parametric test statistics do not satisfy their assumed properties. We identify several sources of misspecification.

JEL Classification: G30

Suggested Citation

Kothari, S.P. and Warner, Jerold B., Measuring Long-Horizon Security Price Performance (October 1995). Working Paper FR 95-19, Available at SSRN: https://ssrn.com/abstract=7345

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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