Practical Applications Using Event Studies and News Analytics

The event study methodology has several meaningful practical applications. The most common ones are listed hereafter:

  • Anomaly detection: The event study methodology detects anomalies in time series data. It has been geared towards the analysis of stock returns and trading volumes, however, can also be applied to other types of data. Variants of the methodolgy are particularly strong in detecting anomalies within data time series that are characterized by having a strong correlate (e.g., stocks and indices).   
  • Financial news analytics: Event studies generate insights and data valuable for telling stories about news and their impact on stock or other asset prices. See our analysis of Volkswagen´s "Diesel-Gate" scandal:
  • Financial Performance Management / Corporate communications: Another areas of application is the continuous monitoring of how the capital markets react upon a firm's stream of corporate press releases. Explicit knowledge of the determinants of stock market responses to the respective press releases can inform corporate communication workers about editorial factors, which contribute to a favorable reception of individual news items by the capital market.
  • Strategy assessment: Further, knowledge about how the capital markets reacted upon a distinct press release (which generally represents a competitive action/decision) is valuable for surveying investor sentiments and thinking. It provides an indication for how investors perceive individual competitive moves of the firm in light of the firm’s strategy and past behavior. Stock market responses may then serve as a benchmark for the legitimacy of the firm’s decisions.
  • Competitor analysis: Applications of the event study methodology can also be used for corporate intelligence. Studying the firm's stock market responses to strategic decisions of rivals (i.e., press releases of these decisions) can reveal the sensitivity of the focal firm to its rivals. This may prove useful in two respects. (1) It helps identify the core competitors from the perspective of the capital markets; (2) It may help managers gauge the impact of rival's strategic decisions on their own firm as perceived by the capital market.
  • Corporate compliance: A classic application relates to a firm-internal topic, corporate compliance. For key corporate events (e.g., an acquisition or divestiture), event studies reveal important information on how the capital markets have absorbed the new information pertaining to the respective event. Investigating the plot of abnormal returns will give an indication on whether information has leaked prior to the announcement of the event or whether insider trading might have taken place.
  • Security fraud litigation: In securities fraud litigation cases, the event study methodology is frequently used to discern whether information that has been used in an allegedly fraudulent action was relevant to investors, and to determine the value of the information (you may visit this related video for further details). It thus serves to establish materiality and calculate damages. Over the recent decades, the method has become an increasingly important instrument to defendants and plaintiffs in private suits and SEC enforcement actions (Mitchell and Netter, 1994).
  • Financial decision making/investment management: News analytics and event studies bridge qualitative and quantitative aspects of investment managment. These methodologies have informed several investment management applications, such as CapitalIQ, Ravenpack, or AlphaFlash. Using these market solutions, event-driven investment managers and hedge funds (e.g., D'Avinci-Invest) seek alpha returns for their investors.

Figure 1: How EST-Research Apps Support Financial Decision Making

Adapted from Mitra and Mitra (2011): 3

  • M&A advisory: Event study methodology can also be used as a supplement for traditional analysis of comparable transactions in M&A pitch books. While prevalent comparable transaction analysis focuses on valuation multiples of similar transactions, event study methodology may help to gain a better understanding of how the market reacted to announcements of similar transactions for both the targets and the acquirers. Including this information might facilitate communication with client management as well as improve decision making on a wide range of topics (e.g., bidding strategy).

References and further studies