Event Study

What Is an Event Study?

An event study is an empirical analysis that looks at the impact of a critical catalyst occurrence or contingent event on the value of a security, for example, company stock.

Event studies can uncover important data about how a security is probably going to respond to a given event. Instances of events that influence the value of a security incorporate a company filing for Chapter 11 bankruptcy protection, the positive announcement of a merger, or a company defaulting on its debt obligations.

How an Event Study Works

An event study, otherwise called event-history analysis, utilizes statistical methods, involving time as the dependent variable and afterward searching for variables that make sense of the duration of an event — or the time until an event happens.

Event studies that utilization time in this manner are frequently employed in the insurance industry to estimate mortality and compute life tables. In business, these types of studies may rather be utilized to forecast how long is left before a piece of equipment fizzles. On the other hand, they could be utilized to foresee how long until a company leaves business.

An event study, whether on the miniature or full scale level, attempts to decide whether a specific event has, or will have, an impact on a business' or alternately economy's financial performance.

Other event studies, like an interfered with time series analysis (ITSA), compare a trend before and after an event to make sense of how, and how much, the event changed a company or a security. This method may likewise be employed to check whether the implementation of a specific policy measure has brought about some statistically significant change after it has been put in place.

An event study led on a specific company looks at any changes in its stock price and how it connects with a given event. It tends to be utilized as a macroeconomic device, as well as breaking down the influence of an event on an industry, sector, or the overall market by taking a gander at the impact of the change in supply and demand.

Event Study Methodology

Hypothetically, a stock price considers all suitable data and expectations about what's in store. As per this theory, it is feasible to dissect the effect of a specific event on a company by taking a gander at the associated impact on the company's stock.

The market model is the most common analysis utilized for an event study. This methodology takes a gander at the actual returns of a baseline reference market and tracks the correlation of a company's stock with the baseline.

The market model screens the abnormal returns on the specific day of an event, studying the stock's returns and contrasting them with the normal or average returns. The difference is the genuine impact on the company. This technique can be utilized after some time, examining back to back days to comprehend what an event means for a stock over the long run.

An event study can uncover greater market trends or examples. On the off chance that a similar type of model is utilized to examine different events of a similar type, it can foresee how stock prices ordinarily answer a specific event.

Features

• An event study, or event-history analysis, looks at the impact of an event on the financial performance of a security, for example, company stock.
• An event study utilizes statistical methods, involving time as the dependent variable and afterward searching for variables that make sense of the duration of an event — or the time until an event happens.
• On the off chance that a similar type of statistical analysis is utilized to dissect various events of a similar type, a model can foresee how stock prices normally answer a specific event.

FAQ

What Is a Stock Event?

A stock event is the point at which a company's stock goes through a change, like a stock split, reclassification, dividend payment, stock combination, or whatever other event that impacts shareholders.

What Is an Event Study in Economics?

In economics, as well as in finance, an event study alludes to whether a statistical relationship exists in the financial markets between a specific event and a public company's stock price or value.

What Are the Steps in Conducting an Event Study?

The most vital phase in an event study is characterizing the event, then picking the companies that the event will hypothetically impact. From that point, normal returns and abnormal returns ought to be resolved utilizing different models, for example, the steady mean return model, the market model, different economic models, etc. The next step is measure and break down the abnormal returns.