Long-Run Event Study

The initial of return-based event studies as put forward by Fama, Fisher, Jensen, and Roll in 1969 captures short-term effects of events on stock prices. For longer term effects, a related methodology has been developed that captures if an event has had a persistant impact on stock prices over periods of time as long as several months or years after the event. This method hence measures more effect persistence than the size of the short term effect. Common applications of long-term event studies include investigations of stock performances following M&A transactions or public offerings of equity. There are two related approaches for such analyses: (1) The buy-and-hold abnormal return approach, and (2) the calendar-time portfolio method, also refered to as Jensen’s alpha approach. Both approaches involve the construction of stock portfolios.

(1) Buy-and-hold abnormal return approach (BHAR)

Buy and hold is an investment strategy where an investor buys stocks and holds them for a long time. The BHAR is based on this principle and calculates abnormal returns by deducting the normal buy-and-hold return from the realized buy-and-hold return.

(2) Calendar-time portfolio approach (CTIME)/Jensen's alpha approach

The CTIME approach calculates the abnormal return of a portfolio consisting of all firms that experienced the event of interest. The abnormal return is defined as the excess return that cannot be explained by expected return models, such as the CAPM or other factor models. The CTIME approach is also named “alpha approach” since "alpha", both in a statistical and an investment theory sense, closely relates to the excess return concept of the CTIME approach. Statistically, alpha refers to the intercept in a time-series regression on actual returns that statistically tests whether these models do explain the actual returns. If they do not explain the actual returns sufficiently, an intercept significantly different from zero results that represents the abnormal returns occured at the event date. Within the context of investments, this alpha reflects the risk-adjusted return measure that expresses the so-called active return on an investment, the return that would be attributable to the investment manager. In event studies, the event substitutes the "investment manager" in being responsible for the abnormal returns. The CTIME approach thus reflects an investor's actual investment experience in the respective stock portfolio. While the method has typically been applied in investment and behavioral and corporate finance research, it has become adopted also in fields like marketing (e.g., Moorman et al., 2012).