An Investigation of Market Microstructure Impacts on Event Study Returns

23 Pages Posted: 8 May 2006  

Ronald C. Lease

Purdue University - Krannert School of Management; National Bureau of Economic Research (NBER)

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

John Page

Tulane University - Accounting & Taxation

Abstract

We investigate the importance of bid-ask spread induced biases on event date returns as exemplified by seasoned equity offerings by NYSE listed firms. We document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature. Buy/sell order flow imbalance is prominent around the offering and induces a relatively large spread bias. If order imbalances are suspected, the researcher can use returns calculated from the midpoint of the closing bid and ask quotes, instead of returns calculated from closing transaction prices, to avoid this return bias.

Keywords: Seasoned equity offering, market microstructure, bid-ask bounce, order flow imbalance

JEL Classification: G14, G24, G32

Suggested Citation

Lease, Ronald C. and Masulis, Ronald W. and Page, John, An Investigation of Market Microstructure Impacts on Event Study Returns. Journal of Finance, Vol. 46, No. 4, pp. 1523-1536, 1991. Available at SSRN: https://ssrn.com/abstract=899663

Ronald C. Lease

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

John Page

Tulane University - Accounting & Taxation ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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