The event study methodology

Review of Quantitative Finance and Accounting, 11 (1998): 111–137 © 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.

The Event Study Methodology Since 1969
JOHN J. BINDER Department of Finance (MC 168), College of Business, University of Illinois-Chicago, 601 S. Morgan St., Chicago, IL 60607-7124

Abstract. This paper discusses the event study methodology, beginning with FFJR (1969), including hypothesis testing, the use of different benchmarks for the normal rate of return, the power of the methodology in different applications and the modeling of abnormal returns as coefficients in a (multivariate) regression framework. It also focuses on frequently encountered statistical problems in event studies and their solutions. Key words: Event study, finance methodology

1. Introduction An often heard statement in economics and finance is that any article which is cited ten or more times a year for ten years is a classic. Even by this standard, the paper by Fama, Fisher, Jensen and Roll (FFJR) (1969), which introduced the event study methodology, stands out in the academic profession. For example, from its publication through 1994 this article was, according to the Social Sciences Citation Index, cited a total of 516 times. This works out to an average of about 21 times a year over a 25 year period. It is, therefore, surprising when Fama (1991, p. 1599) notes in retrospect that the impetus behind the FFJR paper, which was suggested by James Lorie, was simply to develop an application of the new Center for Research in Security Prices (CRSP) monthly return data for New York Stock Exchange (NYSE) stocks. FFJR started a methodological revolution in accounting and economics as well as finance, since the event study methodology has also been widely used in those disciplines to examine security price behavior around events such as accounting rule changes, earnings announcements, changes in the severity of regulation and money supply announcements.1