Mergers, Acquisitions, and Corporate Restructurings, 7th Edition

Research Note: Event Studies Methodology

Throughout the rest of this book we will refer to various empirical research studies. Many of these studies utilize a research methodology called event studies. It is, therefore, useful to briefly discuss how these studies are conducted.

M&A Research: Event Studies

Event studies are used in empirical financial research to measure the impact of a specific event on the market value of a company.¹ However, researchers in other fields, such as accounting, management, and forensic economics, have also increased their use of event studies.²

The more efficient the market, the more quickly a relevant event may cause a change in the market value of the firm. The more rational the market, the more accurate the response will be.

As event studies relate to M&As, such studies seek to measure the impact of an M&A-related event, such as the announcement of a takeover bid, or the implementation of a specific takeover defense, on the value of one of the companies involved. This is done through measuring cumulative abnormal returns (CARs). These returns are determined through measuring the difference between the expected value produced by the capital asset pricing model (CAPM) and the observed actual return.

Specifically, the differences referred to above are called abnormal returns. They are those returns that cannot be fully explained by market movements. The returns that can be explained by market movements are those that are generated by CAPM. ...