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Event Study Methodology in a Nutshell

Event studies quantify the economic effects of discrete events on firms' market capitalizations. A typical event investigated by the methodology are acquisition announcements. To investigate whether stock market participants expect such transactions to create or destroy value, scholars use the event study methodology to quantify the abnormal returns that were assigned to these acquisition decisions surrounding the acquisition announcement dates. The event study methodology predict those returns that would have been expected if the studied event had not occurred and deducts these returns from the actual returns observed on and announcement date and several days prior and after this date. The method thereby corrects for the return that stems from the price fluctuation of the market at the day of the event.

This conceptual idea behind the event study methodology is very versatile and can also be deployed to other economic time series than returns. For this reason, derivates of the method are, for example, used to capture events' abnormal effects on trading volumes and currency exchange rates. The method is common to various research areas, including accounting and finance, management, economics, marketing, information technology, law, and political science. The overall body of event study research is oftentimes structured by the studied event types. As laid out on this website, there is research investigating the stock market responses to economy-wide events (i.e., market shocks, such as regulatory changes, or catastrophic events), and more narrower studies investigating the stock market responses to corporate events, such as mergers and acquisitions, earnings announcements, debt or equity issues, corporate reorganisations, investment decisions and corporate social responsibility. Below you will find lecturing materials suitable to teach the methodology.

Slide-Deck 1: Studying Discrete Events

Slide-Deck 2: The Event Study Methodology - Theory and Application (v1/beta)

Slide-Deck 3: Test Statistics