Event Studies and Abnormal Return
In finance, an abnormal return is the difference between the actual return of a security and the expected return. Abnormal returns are sometimes triggered by “events.” Events can include mergers, dividend announcements, company earnings announcements, interest rate increases, lawsuits, etc. all of which can contribute to an abnormal return. Events in finance can typically be classified as information or occurrences that have not already been priced by the market.
An abnormal return is referred to as either a positive abnormal return or a negative abnormal return, depending on where the actual return falls in relation to the normal return. The abnormal return on an investment is calculated as follows:
RAbnormal = RActual – RNormal
The normal return on an investment can be a forecasted return or it can be the return on an index, such as the Dow Jones or the S&P 500 during the same period. For instance, the normal return for an investment portfolio, such as a mutual fund, might be a forecasted return of 10% for a given year based on past performance; or the 10% (example) return on the S&P 500 index in a given year. In the latter case, it is said that a given investment experienced a given abnormal return relative to the S&P 500.
To illustrate, suppose a stock XYZ experiences a 20% return in a given year. Analysts expected XYZ to experience a return of 10% for that year. The (positive) abnormal rate of return XYZ is:
20% actual return – 10% projected return = 10% positive abnormal return
XYZ experience a positive abnormal return of 10% during in that year.
Whichever topics you choose, you must ensure careful citation of all journal articles and electronic sources of information, and include a list of references. Please make sure that the references are cited and listed in the Harvard style.
Aims and Objectives: This assignment gives you the opportunity to demonstrate awareness and understanding of current research issues surrounding Event Study Methodologies. Word limit: 3,000 words (A4 paper, Times New Roman 12 point, 1.5 line spacing). This limit includes any footnotes and appendices, but excludes the contents page and references. The Word Count must be stated on the cover page of your work.
Topic I: Literature Review
Provide a review of the literature of how to conduct long-run event studies (examining performance more than 12 months following an event). A few articles will be provided on blackboard to start you off with the review but you must search for relevant articles yourself as well. The type of event (e.g. M&A, credit rating changes etc.) may vary in the literature that you select. The focus should be on providing a comprehensive analysis of the methodologies used to conduct long-run event studies.
You should focus on what the different methodologies are, why they are used, and the potential limitations or advantages/disadvantages of using each approach.
You can use the material on Blackboard to get you started, but make sure to utilize at least 15 journal articles to inform your discussion. The format of your answer must include an introduction, a conclusion and references.
The report will be judged on the following criteria: a) Argument, understanding and analysis (e.g. addressing the task with relevant knowledge, understanding and insight; coherent and structured progression of argument); b) Sources and evidence (e.g. breadth and depth of reading; insights and evidence from the literature; proper citation and referencing); and c) Written communication (e.g. organization and presentation).