long run abnormal stock performance ome … · long-run abnormal stock performance: some additional...

34
LONG-RUN ABNORMAL STOCK PERFORMANCE: SOME ADDITIONAL EVIDENCE J.F. BACMANN a AND M. DUBOIS a First Draft: February 2002 a Université de Neuchâtel, Pierre-à-Mazel 7, 2000 Neuchâtel, Switzerland Tel: +41 32 718 13 60 Fax: +41 32 718 13 61 E-mail: [email protected] and [email protected] Financial support by the Swiss National Science Foundation (grant n°1214-056849.99) and by the National Centre of Competence in Research “Financial Valuation and Risk Management” is gratefully acknowledged. The National Centre of Competence in Research are research programmes supported by the Swiss National Science Foundation.

Upload: dangtu

Post on 22-Apr-2018

223 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

LONG-RUN ABNORMAL STOCK PERFORMANCE: SOME ADDITIONAL EVIDENCE J.F. BACMANN

a AND M. DUBOIS

a

First Draft: February 2002

a Université de Neuchâtel, Pierre-à-Mazel 7, 2000 Neuchâtel, Switzerland

Tel: +41 32 718 13 60 Fax: +41 32 718 13 61

E-mail: [email protected] and [email protected]

Financial support by the Swiss National Science Foundation (grant n°1214-056849.99) and by the

National Centre of Competence in Research “Financial Valuation and Risk Management” is gratefully

acknowledged. The National Centre of Competence in Research are research programmes supported by

the Swiss National Science Foundation.

Page 2: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

2

LONG-RUN ABNORMAL STOCK PERFORMANCE: SOME ADDITIONAL EVIDENCE

Abstract: In this research we study the specification and the power of classic test

statistics used in long-term event studies analysis. Using simulations in random samples,

we show that test statistics based on an arbitrary benchmark are well specified and as

powerful as the ones based on the size and book-to-market benchmark. However, when

conditioning the samples on past stock returns performance, we show that a good

matching procedure is required in order to obtain well specified and powerful tests.

Finally, we examine the specification and the power of calendar-time portfolios. The

cross-sectional standardized t-stat is well specified in random samples in which the

frequency of the events is random or depends on the past market returns performance.

However, when the frequency of events is conditioned on past market returns

performance and the stocks are selected among the most extreme returns misspecified

test statistics are obtained.

Page 3: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

1

Since Ibbotson (1975), the analysis of the long-run abnormal stock returns has

attracted a lot of interest in corporate finance. This topic is important for at least two

reasons: first, it is a mean to explore whose actions undertaken by the management

create value and, second it help determining the sources of stocks’ misspricing.

Routinely, empirical studies have reported negative long-run abnormal returns for

some events and positive for others1 casting some doubt on market efficiency.

Recently, several models based on non-rational agent’s behavior have tackled the

problem. However, as underlined by Fama (1998) these models have trouble in

explaining empirical facts for which they are not designed. From an epistemological

standpoint they have not gained yet the status of a full theory. Moreover, empirical

findings show that, depending on the information, investors underreact or overreact

half of the time. Therefore, it could be that long term abnormal returns are not

correctly estimated and/or the statistical tests are biased.

Barber and Lyons (1997) and Kothari and Warner (1997) examined extensively

this methodological issue. They identify three potential sources of misspecification:

the survivor bias, the rebalancing bias and the skewness bias. Lyon, Barber and Tsai

(1999) (LBT hereafter) show that cross-sectional dependence and a bad asset-pricing

model are two additional sources of misspecification. In fact, based on simulations a

la Brown and Warner (1980), LBT show that a “Traditional event study framework

and buy-and-hold abnormal returns calculated using carefully constructed reference

portfolios” yiel well-specified test statistics in random samples. However, as

1 Three to five years negative abnormal returns are found after IPOs, SEOs, mergers, dividends

omissions and listing on the NYSE while the converse is obtained for stock repurchases, splits, spin-

offs and earnings announcement; see Ritter (1991), Ritter and Lougrhan (1995), Ikenberry et al.

(1995), Ikenberry et al. (1996) among others.

Page 4: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

2

underlined by Fama (1998, p. 290, Table 1) most of the events seem selective so that

the experimentaél design suggested by LBT is misleading.

In this research, we use a benchmark randomly selected because Ferson,

Sarkissian and Simin (1999) show that a portfolio constructed with stocks sorted

alphabetically help explain the cross-sectional dispersion of stock returns even if this

method lack of any financial content. In fact, when applied to the measurement of the

long-run performance of stock returns, the same test statistics calculated from a

“non-financial” benchmark provide identical or superior results in terms of

specification and power compared to the size and book-to-market benchmarking.

Unfortunately from a statistical perspective, financial events are rarely random.

When examining stock returns before the event, previous studies have found that

abnormal performance is likely to occur for a wide variety of events. LBT (p. 185)

suggest that matching firms to firms with similar pre-event returns performance

would also control well for the misspecification of the size and book-to-market

matching-firm method. For that purpose, we split NYSE and AMEX stocks in

quintiles according to their stock returns performance over the past twelve months.

Then, we determine two samples by randomly selecting firms within each quintile.

For each firm in both samples, we select randomly a matching-firm in three different

ways. The matching firm is drawn among a) all NYSE-AMEX stocks, b) the first

quintile (highest returns) and c) the fifth quintile (lowest returns). The simulations

show that a good matching procedure (a firm with prior abnormal returns is matched

with a firm with similar returns) leads to well-specified tests.

In addition, “real event studies” frequently exhibit strong clustering during

specific periods of time. For example, several empirical studies document that SEOs

are by far more frequent when markets are bullish. Under these conditions, cross-

Page 5: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

3

sectional dependence of stock returns makes the grouping of event-firms into

portfolios preferable.

Finally, we examine the specification and the power of calendar-time portfolios

with two benchmarks, namely the Fama and French (1993) and Carhart (1997)

models. Abnormal returns are estimated as “in-sample error” (see Mitchell and

Stafford (2000)) and as “forecasted errors” (see Kothari and Warner (1997)) using a

variety of t-statistics (standard t-stat, cross-sectional t-stat, standardized t-stat and

cross-sectional and standardized t-stat) inspired from the short-term event study

setting. When the event-sample is selected randomly, our main results can be

summarized as follows: a) the standardized t-stat has the best specification and is the

most powerful test statistics, b) the period of estimation is not of major concern and,

c) tests constructed with the Carharts’ model (1997) are more conservative and less

powerful than those based the Fama and French (1993) model. When the frequency

of events conditioned on past market returns performance is high, the standardized t-

statistics is still well specified. However, the test statistics are misspecified whenever

the frequency of events conditioned on past stock returns performance is high.

The remainder of the paper is organized as follows. We present the methods used

to calculate abnormal returns and the test statistics in Section I. In Section II, we

examine the specification and the power of various test statistics based on a “non-

financial” matching procedure. In Section III, we study the specification and the

power of these test statistics when the matching is based on past returns. Additional

results using calendar-time portfolios and test statistics adjusted for cross-sectional

heteroscedasticity are provided in Section IV. Section V concludes.

Page 6: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

4

I. Abnormal Returns and Statistical Tests In this section we briefly summarize the various calculations of abnormal returns

and of the statistical tests used in the litterature.

A. Cumulated Abnormal Returns over a long-horizon

The model for measuring the normal returns is the following:

( )it t ctE R I R=

where ( it tE R I ) is the monthly expected return for security i during month t, given

the set of information tI , ctR is the monthly return of the matching-firm or the

control portfolio over the same period. The abnormal return over the month t is

calculated as:

itAR

it it ct itAR R R ε= − +

where is an error term independent of i and t, with zero-mean and

constant variance.

( 2~ 0,it Nε )σ

As in others studies, the temporal aggregation of the abnormal returns is done via a

rebalancing strategy (CARs hereafter) and a buy and hold strategy (BHAR

hereafter).

A.1. Cumulated Abnormal Returns

2

1

, ,

T

i h i tt T

CAR AR=

=∑

where is an estimate of the cumulated abnormal returns for stock i, over

the period

,i hCAR

h T= ,1 ,2,...,i iT

The null hypothesis of no average cumulated abnormal returns is stated as

follows:

Page 7: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

5

1 , 1,1 1

1 1: 0 :N N

i h A i hi i

H CAR vs H CARN N= =

= ≠∑ ∑ , 0

As it is well known, the average cumulated abnormal returns can be obtained by

rebalancing the portfolio (1 USD long in stock i, 1 USD short in the control c) at the

end of each period (month). Because of transaction costs, average cumulated

abnormal returns are no longer attainable. However, Fama (1998) recommends using

this method because the bad-model problem is less acute compared to the buy-and-

hold abnormal returns.

A.2. Buy and Hold Abnormal Returns

Instead of rebalancing the portfolio at the end of each period, a more realistic

strategy consists in buying a portfolio, which is 1 USD long in stock i and 1 USD

short in the control c. This portfolio is hold until the end of the period

. The abnormal performance of stock i is computed as: ,1 ,2,...,i ih T T=

( ) ( )( ),2 ,2

,1 ,1

, = 1 1i i

i i

T T

i h it it tt T t T

BHAR R E R I= =

+ − +∏ ∏

where ,i hBHAR is the buy and hold abnormal return and h is the holding period.

The null hypothesis of no average buy and hold abnormal returns at the horizon h

is stated as follows:

2 , 2,1 1

1 1: 0 :N N

h i h Ai i

H BHAR BHAR vs H BHARN N= =

= =∑ ∑ , 0i h ≠

2H

B. Common Statistical Tests

The most commonly used statistical test in order to test the null hypothesis of no

abnormal return ( ) is the standard t-test: 1 andH

( )h

h

t statN

ωσ ω

− =

Page 8: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

6

where is the sample mean (of the CARs or BHARs) and is the cross-

sectional sample standard deviation for the sample of N firms.

hω ( hσ ω )

However, the distribution of the CARs is often asymmetric and the t-stat must be

adjusted in order to get the proper critical values. This problem is even more acute

for the BHAR. Johnson (1979) proposed the following correction:

21 1ˆ ˆˆ ˆ3 6sat N S skwS skw

N = + +

where ( )

ˆˆ i

S ϖσ ϖ

=

( )( )

3

13

ˆˆ

ˆ

N

ii

i

skwN

ϖ ϖ

σ ϖ=

−=∑

is an estimate of the skewness of the CAR (BHAR)

Sutton (1993) recommend bootstrapping sat in order to obtain a well specified test

statistics. Hence, we proceed as in Lyon, Barber and Tsai (1999): 1000 bootstrapped

samples of size 4bN N=

b

are drawn from the original sample. For each

bootstrapped sample, the sat is calculated as before:

21 1ˆ ˆˆ ˆ3 6

bsa b b b b

b

t N S skw S skwN

= + +

b

( )ˆ

ˆ

b

b bi

S ϖ ϖσ ϖ

−= and ( )

( )

3

13

ˆˆ

ˆ

bNb bi

ib b

b i

skwN

ϖ ϖ

σ ϖ=

−=∑

The critical values *lx (lower bound) and *

ux (upper bound) are obtained from the

empirical distribution of bsat for a given confidence interval : α

* *Pr Pr2

b bsa l sa ut x t x α ≤ = ≥ =

Page 9: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

7

C. The Data

In this analysis we use all the NYSE/AMEX firms with available data on the

Daily CRSP files. The period covered goes from July 1962 through December 1996.

In general, the research on long-term stocks’ performance focuses mainly on

ordinary common shares so that CRSP share codes 10 and 11 are eliminated from

our analysis. We use the Daily Files to compute arithmetic monthly returns. This

allows us to swap the matching-firms in “real time” whenever they are delisted.

Nasdaq stocks are excluded to mitigate the new listing bias. However, there is no

specific reason to eliminate those firms having experienced a specific event like new

listing and not those involved in seasoned equity offerings or split which are also

known to produce abnormal returns.

II. Does Book-to-Market and Size Matching Matter? Barber and Lyon (1997) and Lyon, Barber and Tsai (1999) claim that the

matching criterion is crucial. For random samples, they show that size and book-to-

market is required in order to obtain well-specified tests either for matching-firms

and control portfolios. However, Fama and French (1993) show that the market itself

is an important factor, which cast some doubt on a matching procedure relying on

two criteria only. The matching procedure requires well specified and powerful tests

indeed. However, non-relevant matching criteria must lead to opposite results too.

For that purpose, we choose a criterion without any financial content based on the

alphabetical ranking of the stock; see Ferson, Sarkissian and Simin (1999). In order

to compare our results with Lyon, Barber and Tsai (1999), we use two benchmarks: a

matching-firm and a control portfolio.

A. Data and the Sampling Design

A.1. Matching-Firm

Page 10: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

8

The firms and the event-dates are drawn randomly from the subset of

NYSE/AMEX firms previously defined and from July 1962 trough December 1991.

Whenever the five-years stock returns series is missing or incomplete for a given

pair, a new pair is drawn. We generate 1000 samples of 200 firms each.

The selection of the matching-firm is based on two criteria. First, the matching-

firm is drawn randomly from the initial population of firms available at the event

date. Second, we select the firm at the event date whose CRSP share code is the next

available in the CRSP File. If the matching-firm disappears during the five-years

period, it is replaced by another firm selected randomly in case 1 and by the next

firm in case 2. The swap is made at the delisting time. Obviously, both criteria lack

of any financial content. The question we address is whether this matching procedure

leads to well specified and powerful test statistics too.

A.2. Control Portfolio

During the period covered by our analysis, 2000 stocks are available on the CRSP

Files so that 50 equally-weighted reference portfolios consisting of 40 securities each

are constructed. In each portfolio, stocks are selected randomly with replacement.

When a firm is delisted before the end of the five-years period, it is not replaced in

the portfolio. Brav, Geczy and Gompers (2000) a similar sampling technique.

B. Results

B.1. Specification of Test Statistics

We study the specification of the four test statistics presented in Section I.B. for

the one year, three years and five years horizons. The results are presented in Table I

for a theoretical rejection rate of 5%.

Page 11: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

9

Insert Table I

First, all the test statistics considered here are well specified at the one-year and

the three-years horizons. There is no difference between the random matching and

the criteria based on the following CRSP code firm. Interestingly, the two “non-

financial” matching procedures produce test statistics, which are as well specified in

random samples as the ones based on book-to-market and size criteria. In other

words, there is no gain in using these criteria. From a practical point of view, the

matching of the Compustat Files and the CRSP Files is not necessary. This has two

advantages: the matching is simpler and no bias due to presence in both databases is

introduced.

Second, concerning the five-years horizon, the test statistics based on the control

portfolio remain well specified. Conversely, the test statistics based on the matching-

firm are significantly different at the 1% level from the theoretical rejection rate of

5%. Thus, the control portfolio is the best benchmark for short, medium and long

horizons up to five years.

Third, the correction introduced in the test statistics to account for skewness and

the bootstrapping of the statistics do not out-perform the classic t-stat. In some cases

(BHAR and Matching-firm), the classic t-stat is the unique statistics, which is well-

specified at the five-years horizon.

B.2. Power of Test Statistics

We study the power of the test statistics by adding a constant abnormal return to

each stock. Four different values are examined depending on the horizon. We

consider –20 percent, -10 percent, 10 percent and 20 percent for the one-year horizon

and –50 percent, -20 percent, 20 percent and 50 percent for both the three-years and

Page 12: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

10

the five-years horizons. The results of the simulations are presented in Table II and

summarized in Figure 1.

Insert Table II

As far as the power of the test is concerned, our matching criteria (Random

Matching or Next CRSP Code Matching) lead to similar results. In fact, this is not

surprising because these criteria are “independent” from any financial theory. The

Control Portfolio is a better benchmark than the matching-firm. The power of the test

statistics based on the CARs and a control portfolio is always higher than 90% even

with a small additional increment (10 percent for a one year-horizon and 20 percent

for three to five years horizons).

Strikingly, our method produces more powerful tests than a size and book-to-

market based matching. Let us consider two examples. When 10 percent (-10

percent) are added over a one-year period, the standard Student-t applied to the

BHARs has a power of 43% (39%) in LBT compared to 63.4% (58.6%); see Table

II-A. The difference is even more important with the bootstrapped t-test corrected for

the skewness: we find 95.4%(63.3%) against 70% (55%) in LBT.

In general, bootstrapping the statistics increases the specification of the tests

statistics which is even better after correcting for skewness. However, this result

does not hold any longer for the power of the tests. Contrarily to LBT, the

bootstapped statistics are less powerful than their standard counterparts and

sometimes there is a huge difference. In particular, the power of the bootstrapped t-

stat adjusted for skewness (calculate with the BHAR and the control portfolio) is

63.3 percent as opposed to 82.5 percent with the standard t-stat. This is really

embarrassing because this techique was supposed to perform well in that setting.

Page 13: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

11

Insert Figure 1

We see that the test statistics constructed from a benchmark based on size and

book-to-market are less powerful than the ones constructed from an arbitrary

benchmark. However, these discrepancies may be explained by the sampling designs

of both studies. Nevertheless, our main conclusion remains: simulations based on

event-firms selected randomly do not help validate criteria in forming matching-firm

or control portfolio benchmarks.

II. Matching and Past Performance A. Conditional Samples Based on Past Returns

The characteristics of our sample remain unchanged. Our analysis is based on

NYSE/AMEX firms from July 1962 through December 1996 (CRSP share codes 10

and 11 excluded). Each month, the securities are sorted according to their twelve-

months prior returns and affected to the corresponding quintile. The quintile Q1 (Q5)

contains the stocks with previous high returns (low returns). Two types of event-firm

samples are determined depending on the previous performance. We construct these

samples by randomly drawing 1000 samples of 200 firms from Q1 and Q5

separately.

In order to measure the abnormal returns, a matching-firm is chosen in three

different ways: a) a random selection over the whole population, b) a random

selection among Q1 firms, and c) a random selection among Q5 firms.

For each event-firm, we draw randomly 40 stocks from Q1 (Q5) and calculate the

buy and hold abnormal returns for the corresponding equally-weighted portfolio at

the one-year, three-years and five-years horizons. When a firm is delisted during the

performance measurement period, it is not replaced beyond that date.

Page 14: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

12

B. Results

To assess the specification of the test conditioned on past returns, we use the

bootstrapped t-stat adjusted for skewness. In Table III, we report the critical values at

2.5% and 97.5% in order to highlight the asymmetry of the biases depending on a)

the benchmark (matching-firm or control portfolio), and b) the adequacy of the

matching procedure based on past returns.

Insert Table III

First, the bootstrapped t-stat adjusted for skewness is ill-specified when the

matching-firm or the control portfolio is selected randomly. Not surprisingly, the

results are even worse when firms with high past performance (low) are matched

against a control with low past performance (high). In fact, we reproduce a specific

momentum-type strategy, which yield a positive performance2.

Second, with matching-firms or control portfolios selected to match past stock

returns of event-firms, the test statistics is well specified and nearly symmetric (the

empirical rejection rate is the same for the upper and the lower bound).

The characteristics of the event-firms are generally ignored in empirical studies.

Despite the fact that events are rarely random, the matching-firm or a control

portfolio procedure based on size and book-to-market is chosen routinely. However,

this is not the best procedure whenever the event-sample exhibit previous specific

patterns in stock returns.

2 Cooper (1999) provides evidence that wide varieties of momentum strategies (portfolio weights)

produce significant abnormal returns.

Page 15: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

13

III. Abnormal Returns in Calendar Time

A. Data and the Sampling Design

The characteristics of our sample are slightly modified. Our analysis is based on

NYSE/AMEX firms from July 1968 through December 1988 (CRSP share codes 10

and 11 excluded) because of the availability of the size and book-to market factors

which were downloaded from Ken French’s website3.

First, the firms and the event-dates are drawn randomly from the subset of

NYSE/AMEX firms previously defined and from July 1968 through December 1991.

Whenever the three-years stock returns series is missing or incomplete for a given

pair, a new pair is drawn. We construct 1000 samples of 200 firms each, whose

returns are aggregated in order to form 1000 equally-weighted portfolios. The

number of firms may not be constant up to five years within each portfolio because

of delisting. Nevertheless, there is no general agreement on how to circumvent this

problem.

Second, we assume that events are no longer uniformly distributed over time.

Depending on the previous twelve-months market returns ( ), the number of

events within that month is defined as follows:

12mtR

• : no event, 10% 12mtR− ≤

• : one event (normal frequency), 10% 12 30%mtR− ≤ ≤

• : six events (high frequency). 30% 12mtR≤

Firms are drawn randomly from the population in both normal and high frequency

event-periods. This sampling allows us to examine the case of events occurring

mostly during bullish market periods.

3 Update Fama and French Factors are available at

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/

Page 16: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

14

Third, in high-frequency periods firms are drawn randomly from the sub-sample

of stocks having experienced high twelve-months returns (above 20%), which

corresponds to firms engaged in the event because they have high past returns.

Fourth, we examine the converse setting in which the frequency of events is

increased when the market was bearish ( ). In that case, stocks are

drawn randomly from the population (bearish random) and from the previous lowest

twelve-months returns (bearish, loser).

12 30%mtR ≤ −

To study the power of the tests, each month we add a specific increment to the

monthly stock returns such that the abnormal return is equal to a given increment at

the end of the five-years holding period4. The incremental abnormal returns take the

following value: -20 percent, -10 percent, 10 percent and 20 percent.

B. Abnormal Returns and Statistical Tests

The general model used to calculate abnormal returns is the following:

( )2

1

i

i

T

it it t ik ikt itk T

R E R I γ δ ε=

= + +∑

where ikγ is the abnormal return of stock over month , i k

iktδ is a dummy variable equal to 1 whenever k and 0 otherwise, t=

1iT is the beginning of the window for the stock i ,

2iT is the end of the window for the stock , i

itε is an error term with zero mean and constant variance . ( )20, iN σ

First, expected returns are described by the Fama and French (1993) model:

( ) ( )it t ft i mt ft i t i tE R I R R R s SMB h HMLβ= + − + +

4 The monthly increment corresponding to a total increment of 30 percent is equal to 60 1 0.30 1 0.004382+ − = .

Page 17: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

15

where is the return on the three-month Treasury bills, is the return of the

market portfolio (CRSP value-weighted index), is the return of the size

portfolio, is the return of the book-to-market portfolio,

ftR

HML

mtR

t

tSMB

t I is the information

set provided by , and . mtR tSMB tHML

Brav, Geczy and Gompers (2000) and Jegadeesh (2000) use an extension of the

Fama and French model, namely the four factor model proposed by Carhart (1997).

The fourth factor is the portfolio 12M . It consists in investing an equal amount in

the 30% of stocks which have experienced the highest returns during the last twelve

months (from t through ) and being short in the 30% with the lowest

returns. The equation is:

12− 1t −

( ) ( ) 12it t ft i mt ft i t i t i tE R I R R R s SMB h HML m PRβ= + − + + +

where are the monthly returns of portfolio 12tPR 12M .

Four sets of parameters are estimated for both models and used to forecast both

the conditional mean and the conditional variance5. First, the parameters are

estimated over the event-period ,1 ,2,...,i iT T for each stock i as in Mitchell and

Stafford (2000), abnormal returns being in sample error-estimates. Second, the five-

years period before the event is used, and abnormal returns are forecasted errors.

Third, the model is estimated with a five-years moving window ending at time t ,

and the one-period ahead forecast estimates the abnormal return. Fourth, the window

used for parameter estimation expends until t , and the abnormal return is

calculated as before.

1−

1−

The null hypothesis of no abnormal returns can be written as follows:

5 See Tashman (2000) concerning the forecasting with linear regression models.

Page 18: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

16

3 3,1 1 1 1

1 1: 0 :T N T N

it itA

t i t it t

H vs HT n T n

γ γ= = = =

= ≠∑∑ ∑∑ 0

where is the number stocks in month t within the event-portfolio, T is the

total number of periods for which the portfolio is defined. We omit the months for

which the portfolio contains no stocks

tn

6.

Whenever, the series is independent and has finite variance, the hypothesis can be

tested with a standard t-test (see eq. xx). However, the portfolios’ weights are time

varying, which is a potential source of heteroscedasticity because the variance is a

decreasing function of the number of stocks within the portfolio. Therefore, the t-stat

is calculated with the series of abnormal returns standardized by the series of their

own residual variances 21

ˆtnit

i t itn sγ

=∑ . In so doing, low-frequency event-periods are not

over-weighted.

Another potential source of heteroscedasticity comes from both the variances of

the stocks, which is specific and the forecasting horizon, which depends on the

forecasting model7. First, the series of abnormal returns is standardized by the

forecasted variance and aggregated at each time t given portfolios’ weights

producing a new series on which the standard t-test and the cross-sectional t-test are

calculated.

C. Results

C.1. Alternative Test Statistics in Random Samples

6 This feature occurs very seldom. In fact, the probability of having no stock is neglectable. 7 The calculation of these test statistics follow Patell (1976) and Boehmer, Poulsen and Musumeci

(1991) in which they are found to be well-specified and powerful for the short term (typically a ten

days window).

Page 19: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

17

The analysis of the empirical specification in random samples is presented in

Table IV. The results concerning the specification correspond to no abnormal returns

(0 percent increment). Anything else being equal, the choice of the benchmark is not

of major concern as the test statistics are very similar. The rejection rate of the null

(no abnormal return) tends to be slightly higher than the theoretical rate of 5 percent

with Carharts’ (1997) model, while the converse is true with Fama and French

(1993) model. Thus, the former is slightly more conservative.

Insert Table IV

The estimation period is not very important either. Nevertheless, the estimation

over the sample-period provides well specified test statistics (with the exception of

the standardized t-test and the Carhart model) at the 1 percent level8. This is

interesting from a practical perspective because no returns are required prior to the

event.

As far as the specification is concerned, and independently of both the model and

the estimation period, the cross-sectional variance adjustment, which accounts for

the time-varying variance of the portfolio (t-cross and t-standard cross) matters. The

standardization (adjustment for the specific residual variance of the stock) has a

minor impact. Even more, as it was the case for the short-term analysis (see

Bohemer, Poulsen and Musumeci (1991)), standardization of the abnormal returns

alone deteriorates the specification of the test. When both corrections are applied

(standardization and cross-sectional adjustment), the empirical specification is close

to its theoretical counterpart whatever the model and the estimation period.

8 Our results apparently contradit Kothari and Warner (1997). However, sampling methods (grouping

in portfolio instead of single stocks) and standardization do not allowed a direct comparison.

Page 20: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

18

The results presented above concerning the benchmark and the estimation period

extend to the power of the tests. However, test statistics adjusted for the cross-

sectional variance are less powerful than the classic t-stat and the standardized t-stat.

To conclude, when the abnormal performance is of an unknown form, the t-statistics

based on the standardized abnormal returns calculated with the Fama and French

(1993) model offers a reasonable solution.

C.2. Alternative Test Statistics in Non Random Samples

Following Loughran and Ritter (2000), we allow the frequency of events to

depend strongly on the market past performance. The purpose is to construct a more

realistic sampling design, as many events are driven by past performance. The results

concerning the specification of the test statistics are presented in Table V.

Insert Table V

Strikingly, whenever the event is the consequence of the extreme stock past

returns performance, the results concerning the specification are disastrous. We find

almost surely an abnormal performance. In fact, the simulation portfolios are

momentum type portfolios long (short) in past winners (losers) and short (long) in

the market for the Bullish-Winner (Bearish-Loser) sampling, which are known to

produce abnormal performance. In this setting, the matching-firm procedure is by far

the best solution in order to obtain well-specified test statistics.

When the event-frequency is random, the results (see Table VI) are similar to

what was found in random samples (see Section III C.1.). Once again, the t-test

based on the cross-sectional standardized abnormal returns is well specified. The

power of the test statistics presents also similar patterns.

Page 21: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

19

Insert Table VI

In general, previous findings are confirmed. The power of the test statistics in

detecting an abnormal return is higher in bearish market periods and for positive

abnormal returns as well. Test statistics calculated with the Fama and French model

estimated during the event-period are the most powerful. Finally, the cross-sectional

variance adjustment does not produce powerful test statistics.

IV. Conclusion The intent of this research was to study the specification and the power of classic

test statistics used in long-term event study analysis. Using random samples, we

showed that an arbitrary benchmark without any financial content leads to test

statistics that are as well specified as the ones based on the size and book-to-market

benchmark.

However, pre-event abnormal performance has been found which cast some doubt

on the reliability of simulations based on pure random samples. When conditioning

the samples on the past stock returns performance, our simulations showed that a

good matching procedure (a firm with similar returns) leads to well specified tests.

Finally, we examined the specification and the power of calendar-time portfolios.

When the event-sample is selected randomly, our main results can be summarized as

follows. The cross-sectional standardized t-stat has the best specification among the

four tests statistics we examined. The period of estimation is not of a major concern.

As far as the benchmark is concerned, Carhart model (1997) is slightly more

conservative than Fama and French (1993) model. When the frequency of events is

conditioned on past market returns performance, the cross-sectional standardized t-

statistics remains well specified whenever the stocks are selected randomly.

Page 22: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

20

However, when the frequency of events is conditioned on past market returns

performance and stocks are selected among the most extreme performers, all the test

statistics examined are misspecified and powerless.

As underlined by LBT, the analysis of long-run abnormal returns is treacherous as

there is no general method, which performs well in the situations frequently

encountered in empirical studies. The pattern of abnormal returns during the one-

year period preceding the event has a strong impact on both the specification and the

power of test statistics. Thus, it is worth paying attention to the specificity of the

sample.

Page 23: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

21

References

Barber, B. and J. Lyon, 1997. Detecting long-run abnormal stock returns: the empirical power and specification of test-statistics. Journal of Financial Economics 43, 341-372.

Boehmer, E., J. Musumeci and A. Poulsen, 1991. Event study methodology under conditions of event-induced variance. Journal of Financial Economics 30, 253-272.

Brav, A., C. Geczy and P. Gompers, 2000. Is the abnormal return following equity issuances anomalous?. Journal of Financial Economics 56, 209-250.

Brock, W., J. Lakonishok and B. LeBaron, 1992. Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance 47, 1731-1764.

Brown, S. and J. Warner,1980. Measuring security price performance. Journal of Financial Economics 8, 205-258.

Brown, S. and J. Warner, 1985. Using daily stock returns: the case of event studies. Journal of Financial Economics 14, 3-31.

Carhart, M., 1997. On persistence in mutual fund performance. Journal of Finance 52, 57-82. Cooper, M.,1999. Filter rules based on price and volume in individual security overreaction. Review of Financial Studies 12, 901-935. DeBondt, W. and R. Thaler, 1985. Does the stock market overreact?. Journal of Finance 40, 793-805. Eckbo, E., R. Masulis and O. Norli, 2000. Seasoned public offerings : resolution of the ‘new issues

puzzle’. Journal of Financial Economics 56, 251-292. Fama, E., 1998. Market efficiency, long-term returns, and behavioral finance. Journal of Financial

Economics 49, 283-306. Fama, E. and K. French, 1992. The cross-section of expected returns. Journal of Finance 47, 427-465. Fama, E. and K. French, 1993. Common risk factors in the returns on stocks and bonds. Journal of

Financial Economics 33, 3-56. Ferson, W.E., E. Sarkissian and T. Simin, 1999. The alpha factor asset pricing model: a parable.

Journal of Financial Markets 2, 49-68. Ferson, W.E. and R.W. Schadt, 1996. Measuring fund strategy and performance in changing

economic conditions. Journal of Finance, 425-461. Ibbotson, R., 1975. Price performance of common stock new issues. Journal of Financial Economics

2, 235-272. Ikenberry, D., J. Lakonishok and T. Vermaelen, 1995. Market underreaction to open market share

repurchases. Journal of Financial Economics 39, 181-208. Jaffe, J.F., 1974. Special information and insider trading. Journal of Business 47, 410-428. Jegadeesh, N., 2000. Long-term performance of seasoned equity offerings: benchmark errors and

biases in expectations. Financial Management 29, 5-30. Kothari, S. and J. Warner, 1997. Measuring long-horizon security price performance. Journal of

Financial Economics 43, 301-339. Kothari, S. and J. Warner, 2001. Evaluating mutual fund performance, Journal of Finance,

Forthcoming. Loughran, T. and J. Ritter, 1995. The new issues puzzle. Journal of Finance 50, 23-51. Loughran, T. and J. Ritter, 2000. Uniformly least powerful tests of market efficiency. Journal of

Financial Economics 55, 361-390. Lyon, J., B. Barber and C. Tsai, 1999. Improved methods for tests of long-run abnormal stock returns.

Journal of Finance 54, 165-202. Mandelker, G., 1974. Risk and return: the case of merging firms. Journal of Financial Economics 1,

303-335. Mitchell, M. and E. Stafford, 2000. Managerial decisions and long-term stock price performance.

Journal of Business 73, 287-320. Patell, J., 1976. Corporate forecasts of earnings per share and stock price behaviour: empirical tests.

Journal of Accounting Research 14, 246-276. Ritter, J., 1991. The long-term performance of initial public offerings. Journal of Finance 46, 3-27. Tashman, L., 2000. Out-of-sample tests of forecasting accuracy: an analysis and review. International

Journal of Forecasting 16, 437-450.

Page 24: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

22

Tabl

e I:

The

Spec

ifica

tion

of A

ltern

ativ

e Te

st S

tatis

tics B

ased

on

a R

ando

m M

atch

ing

in R

ando

m S

ampl

es

In th

is ta

ble

the

perc

enta

ge o

f 100

0 sa

mpl

es o

f 200

firm

s tha

t rej

ect t

he n

ull h

ypot

hesi

s of n

o an

nual

, thr

ee-y

ears

and

five

-yea

rs a

bnor

mal

retu

rn a

t the

theo

retic

al

leve

l of 5

per

cent

are

pre

sent

ed. T

he sa

mpl

e se

lect

ion

is b

ased

on

a no

n fin

anci

al c

riter

ion

(ran

dom

mat

chin

g or

nex

t CR

SP c

ode)

. Bot

h th

e cu

mul

ativ

e ab

norm

al

retu

rns (

CA

R) a

nd b

uy a

nd h

old

abno

rmal

retu

rn (B

HA

R) a

re u

sed.

Bol

d ita

lic c

hara

cter

s ind

icat

e th

at th

e em

piric

al re

ject

ion

rate

is d

iffer

ent a

t the

1 p

erce

nt

leve

l fro

m th

e th

eore

tical

reje

ctio

n ra

te.

R

ando

m M

atch

ing

Nex

t CR

SP C

ode

Mat

chin

g H

oriz

on

1 ye

ar

3 ye

ars

5 ye

ars

1 ye

ar

3 ye

ars

5 ye

ars

C

AR

Mat

chin

g Fi

rm

t-sta

t

5.

46.

47.

8 5.

36.

67.

7 t-s

tat b

oots

trap

5.3

6.5

7.9

5.4

6.

47.

7 t-s

kew

5.

56.

68.

1 5.

46.

88.

0 t-s

kew

boo

tstra

p 5.

0 6.

4 7.

8 5.

2

6.1

7.4

C

AR

Con

trol P

ortfo

lio

t-sta

t

5.4

5.9

6.1

5.5

5.3

5.5

t-sta

tboo

tstra

p

5.

85.

55.

95.

65.

05.

5t-s

kew

5.

65.

76.

35.

85.

65.

6t-s

kew

boot

stra

p

5.

75.

45.

85.

24.

85.

4

BH

AR

Mat

chin

g Fi

rm

t-sta

t

5.0

4.4

4.8

6.2

4.6

4.6

t-sta

t boo

tstra

p 6.

1 6.

5 7.

8

7.6

6.2

7.0

t-ske

w

6.

17.

2 8.

57.

16.

3 7.

6 t-s

kew

boo

tstra

p 5.

8 5.

9 7.

7 6.

9

6.

16.

8

BH

AR

Con

trol P

ortfo

lio

t-sta

t

5.9

5.2

5.3

6.1

4.5

4.3

t-sta

tboo

tstra

p

6.

06.

26.

86.

35.

95.

4t-s

kew

5.6

6.2

7.3

5.9

6.3

6.0

t-ske

wbo

otst

rap

5.6

4.9

5.2

5.8

5.3

5.3

Page 25: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

23

Tabl

e II

-A: T

he P

ower

of T

est S

tatis

tics B

ased

on

a R

ando

m M

atch

ing

in R

ando

m S

ampl

es, o

ne-y

ear h

oriz

on

In th

is ta

ble,

we

pres

ent t

he p

erce

ntag

e of

100

0 sa

mpl

es o

f 200

firm

s dra

wn

rand

omly

that

reje

ct th

e nu

ll hy

poth

esis

of n

o an

nual

(Pan

el A

), th

ree-

year

s (Pa

nel B

) an

d fiv

e-ye

ars (

Pane

l C) a

bnor

mal

retu

rn fo

r var

ious

leve

ls o

f abn

orm

al re

turn

s and

hor

izon

s. Th

e sa

mpl

e se

lect

ion

is b

ased

on

a no

n fin

anci

al c

riter

ion

(ran

dom

m

atch

ing

or n

ext C

RSP

cod

e). B

oth

the

cum

ulat

ive

abno

rmal

retu

rns (

CA

R) a

nd b

uy a

nd h

old

abno

rmal

retu

rn (B

HA

R) a

re u

sed.

R

ando

m M

atch

ing

Nex

t CR

SP C

ode

Mat

chin

g In

crem

ent

-20

%

-10

%

10 %

20

%

-20

%

-10

%

10 %

20

%

C

AR

Mat

chin

g Fi

rm

t-sta

t

100.

075

.081

.410

0.0

100.

077

.984

.610

0.0

t-sta

t boo

tstra

p

99

.977

.378

.299

.810

0.0

75.3

80.6

100.

0t-s

kew

10

0.0

73

.781

.599

.910

0.0

77.6

84.1

100.

0t-s

kew

boo

tstra

p

99

.574

.875

.399

.899

.873

.078

.599

.7

CA

R C

ontro

l Por

tfolio

t-s

tat

10

0.0

96.3

97.2

100.

0 10

0.0

97.2

97.4

100.

0t-s

tat b

oots

trap

100.

093

.497

.110

0.0

100.

094

.396

.410

0.0

t-ske

w

99.9

95.2

97.0

100.

099

.896

.397

.510

0.0

t-ske

w b

oots

trap

99.3

89.7

96.4

100.

099

.391

.294

.810

0.0

B

HA

R M

atch

ing

Firm

t-s

tat

98

.058

.663

.498

.2

98.9

59.3

65.3

98.9

t-sta

t boo

tstra

p

98

.360

.559

.097

.198

.160

.562

.397

.4t-s

kew

96

.6

58

.563

.396

.797

.158

.065

.197

.5t-s

kew

boo

tstra

p

95

.256

.953

.694

.194

.656

.057

.394

.7

BH

AR

Con

trol P

ortfo

lio

t-sta

t

99.2

82.5

91.6

100.

0 99

.483

.193

.310

0.0

t-sta

t boo

tstra

p

98

.171

.296

.010

0.0

98.2

73.9

94.8

100.

0t-s

kew

94

.6

73

.794

.410

0.0

94.1

74.0

95.4

100.

0t-s

kew

boo

tstra

p

88

.863

.395

.410

0.0

88.8

66.2

94.2

100.

0

Page 26: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

24

Tabl

e II

-B (c

ontin

ue):

The

Pow

er o

f Tes

t Sta

tistic

s Bas

ed o

n a

Ran

dom

Mat

chin

g in

Ran

dom

Sam

ples

, thr

ee-y

ears

hor

izon

R

ando

m M

atch

ing

Nex

t CR

SP C

ode

Mat

chin

g In

crem

ent

-50

%

-20

%

20 %

50

%

-50

%

-20

%

20 %

50

%

C

AR

Mat

chin

g Fi

rm

t-sta

t

100.

079

.694

.710

0.0

100.

081

.695

.310

0.0

t-sta

t boo

tstra

p

10

0.0

84.4

91.3

100.

010

0.0

86.7

91.8

100.

0t-s

kew

10

0.0

79

.594

.710

0.0

100.

081

.495

.210

0.0

t-ske

w b

oots

trap

100.

083

.288

.910

0.0

100.

084

.689

.610

0.0

C

AR

Con

trol P

ortfo

lio

t-sta

t

100.

099

.299

.710

0.0

100.

099

.299

.410

0.0

t-sta

t boo

tstra

p

10

0.0

98.6

99.6

100.

010

0.0

99.0

99.4

100.

0t-s

kew

99

.9

99

.099

.710

0.0

99.9

98.8

99.3

100.

0t-s

kew

boo

tstra

p

99

.997

.699

.410

0.0

99.9

97.4

98.7

100.

0

BH

AR

Mat

chin

g Fi

rm

t-sta

t

96.5

43.2

50.0

97.8

97

.742

.051

.698

.6t-s

tat b

oots

trap

97.5

45.8

46.0

97.1

97.5

45.3

48.4

97.5

t-ske

w

93.3

44.4

50.2

94.7

94.9

42.3

53.0

95.4

t-ske

w b

oots

trap

92.4

42.3

42.7

91.6

92.9

40.9

44.5

92.2

B

HA

R C

ontro

l Por

tfolio

t-s

tat

98

.058

.192

.310

0.0

98.2

62.5

92.7

100.

0t-s

tat b

oots

trap

96.9

47.6

94.9

100.

097

.550

.594

.010

0.0

t-ske

w

84.4

45.8

95.7

100.

084

.949

.995

.110

0.0

t-ske

w b

oots

trap

78.1

42.1

94.7

100.

078

.944

.594

.810

0.0

Page 27: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

25

Tabl

eau

II-C

(con

tinue

) : T

he P

ower

of T

est S

tatis

tics B

ased

on

a R

ando

m M

atch

ing

in R

ando

m S

ampl

es, f

ive-

year

s hor

izon

R

ando

m M

atch

ing

Nex

t CR

SP C

ode

Mat

chin

g In

crem

ent

-50

%

-20

%

20 %

50

%

-50

%

-20

%

20 %

50

%

C

AR

Mat

chin

g Fi

rm

t-sta

t

100.

056

.489

.410

0.0

100.

058

.391

.310

0.0

t-sta

t boo

tstra

p

10

0.0

65.4

81.0

100.

010

0.0

64.0

82.9

100.

0t-s

kew

10

0.0

56

.089

.310

0.0

100.

057

.791

.110

0.0

t-ske

w b

oots

trap

100.

064

.578

.610

0.0

100.

063

.380

.210

0.0

C

AR

Con

trol P

ortfo

lio

t-sta

t

100.

096

.595

.510

0.0

100.

096

.296

.110

0.0

t-sta

t boo

tstra

p

10

0.0

92.2

95.5

100.

010

0.0

94.6

95.7

100.

0t-s

kew

10

0.0

95

.395

.410

0.0

100.

095

.296

.210

0.0

t-ske

w b

oots

trap

100.

090

.094

.510

0.0

99.8

92.1

94.1

100.

0

BH

AR

Mat

chin

g Fi

rm

t-sta

t

72.5

19.7

25.3

74.4

75

.919

.122

.878

.4t-s

tat b

oots

trap

77.2

22.2

21.8

74.8

76.0

23.5

22.1

75.4

t-ske

w

71.2

24.5

28.8

69.9

72.4

23.3

26.2

74.8

t-ske

w b

oots

trap

69.7

21.7

20.8

65.3

67.9

21.7

21.4

67.5

B

HA

R C

ontro

l Por

tfolio

t-s

tat

76

.316

.974

.210

0.0

77.9

18.3

75.9

99.9

t-sta

t boo

tstra

p

72

.014

.773

.999

.975

.516

.976

.010

0.0

t-ske

w

59.0

11.8

85.3

100.

062

.913

.785

.010

0.0

t-ske

w b

oots

trap

62.1

13.5

75.9

100.

062

.414

.677

.910

0.0

Page 28: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

26

Figu

re 1

: Pow

er o

f the

Boo

tstra

pped

Stu

dent

t-te

st fo

r the

BH

AR

Stra

tegy

with

a R

ando

m M

atch

ing-

Firm

s

This

Fig

ure

pres

ents

the

empi

rical

per

cent

age

that

reje

ct th

e nu

ll hy

poth

esis

of n

o an

nual

, thr

ee-y

ears

and

five

-yea

rs b

uy a

nd h

old

abno

rmal

retu

rns (

BH

AR

) for

va

rious

leve

ls o

f inc

rem

enta

l abn

orm

al re

turn

s (x-

axis

) and

hor

izon

s. Th

e sa

mpl

e se

lect

ion

cons

ists

of 1

000

sam

ples

of 2

00 ra

ndom

firm

s who

se m

atch

ing

is

base

d on

a n

on fi

nanc

ial c

riter

ion

(the

mat

chin

g-fir

m is

dra

wn

rand

omly

). Th

e re

sults

are

for t

he b

oots

trapp

ed t-

test

adj

uste

d fo

r ske

wne

ss

0102030405060708090100

-50

-40

-30

-20

-10

010

2030

4050

Abn

orm

al R

etur

ns

pow

er

1 ye

ar3

year

s5

year

s

Page 29: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

27

Tabl

e II

I: Sp

ecifi

catio

n of

Boo

tstra

pped

-adj

uste

d Te

st S

tats

itics

in M

omen

tum

Bas

ed S

ampl

es

In th

is ta

ble

the

perc

enta

ge o

f 100

0 sa

mpl

es o

f 200

firm

s tha

t rej

ect t

he n

ull h

ypot

hesi

s of n

o an

nual

, thr

ee-y

ears

and

five

-yea

rs a

bnor

mal

retu

rn a

t the

theo

retic

al

leve

l of 2

.5 p

erce

nt a

nd 9

7.5

perc

ent a

re p

rese

nted

. The

sam

ple

sele

ctio

n is

bas

ed th

e tw

elve

-mon

ths p

ast p

erfo

rman

ce o

f frim

s whi

ch a

re c

lass

ified

into

qui

ntile

. Th

e fir

ms a

re ra

ndom

ly d

raw

n fr

om th

e po

pula

tion

(ran

dom

), th

e fir

st q

uint

ile (h

igh

perf

orm

ance

) and

the

fifth

qui

ntile

(low

per

form

ance

). Th

e bu

y an

d ho

ld

abno

rmal

retu

rn (B

HA

R) i

s use

d in

ord

er to

est

imat

e th

e ab

norm

al p

erfo

rman

ce. T

est s

tatis

tics a

re b

oots

trapp

ed st

atis

tics (

mat

chin

g-fir

m) a

djus

ted

for s

kew

ness

(c

ontro

l por

tfolio

). B

old

italic

cha

ract

ers i

ndic

ate

that

the

empi

rical

reje

ctio

n ra

te is

diff

eren

t at t

he 1

per

cent

leve

l fro

m th

e th

eore

tical

reje

ctio

n ra

te.

Hor

izon

1 ye

ar

3 ye

ars

5 ye

ars

C

ontro

l

2.5%

97

.5%

2.5%

97

.5%

2.5%

97

.5%

Sam

ple

with

Pas

t Hig

h Pe

rfor

man

ce

Mat

chin

g-fir

m

Ran

dom

0.3

8.1

2.4

3.3

6.5

1.3

Con

trol P

ortfo

lio

Ran

dom

0.

2

8.0

5.8

0.8

23.1

0.2

Mat

chin

g-fir

m

Hig

h pe

rfor

man

ce

2.3

2.7

2.6

2.5

2.8

2.4

Con

trol P

ortfo

lio

Hig

h pe

rfor

man

ce

2.1

2.8

2.4

2.7

2.8

2.7

Mat

chin

g-fir

m

Low

per

form

ance

0.0

35.3

1.2

8.3

9.8

2.0

Con

trol P

ortfo

lio

Low

per

form

ance

0.

0

50

.64.

21.

9 23

.0

0.0

Sam

ple

with

Pas

t Low

Per

form

ance

M

atch

ing-

firm

R

ando

m12

.90.

52.

1 2.

40.

45.

8C

ontro

l Por

tfolio

R

ando

m

13.6

0.1

0.8

11.2

0.0

45.1

Mat

chin

g-fir

m

H

igh

perf

orm

ance

28.3

0.0

3.4

1.8

0.5

9.6

Con

trol P

ortfo

lio

Hig

h pe

rfor

man

ce

30.8

0.

02.

1 6.

80.

030

.2M

atch

ing-

firm

Lo

w p

erfo

rman

ce

2.0

2.8

2.2

2.7

2.3

2.6

Con

trol P

ortfo

lio

Low

per

form

ance

2.

52.

12.

72.

82.

82.

5

Page 30: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

28

Tabl

e IV

: Spe

cific

atio

n an

d Po

wer

of T

est S

tatis

tics w

ith C

alen

dar P

ortfo

lios i

n R

ando

m S

ampl

es

In th

is ta

ble,

we

pres

ent t

he e

mpi

rical

reje

ctio

n ra

te o

f the

nul

l hyp

othe

sis (

no a

bnor

mal

retu

rns)

with

incr

emen

ts ra

ngin

g fr

om –

30 p

erce

nt to

30

perc

ent.

It is

ca

lcul

ated

ove

r 100

0 sa

mpl

es o

f 200

firm

s dra

wn

rand

omly

. The

firm

s are

hol

d a

five-

year

s per

iod

and

aggr

egat

e in

to 1

000

equa

lly-w

eigh

ted

portf

olio

s. Th

e fo

llow

ing

regr

essi

ons a

re e

stim

ated

(

)(

)an

d12

RR

hH

ML

RR

hH

ML

mPR

αit

fti

im

tft

it

it

itit

fti

im

tft

it

it

ii

itR

RsS

MB

RR

sSM

εα

βε

−=

++

+−

=+

++

+

−+

−+

whe

re

is th

e m

onth

ly re

turn

on

the

cale

ndar

-tim

e po

rtfol

io,

is th

e re

turn

on

the

thre

e-m

onth

Tre

asur

y bi

lls,

is th

e re

turn

of t

he m

arke

t por

tfolio

(CR

SP

valu

e-w

eigh

ted

inde

x),

is th

e re

turn

of t

he si

ze p

ortfo

lio,

itRft

Rm

tR

tSM

Bt

HM

L is

the

retu

rn o

f the

boo

k-to

-mar

ket p

ortfo

lio a

nd w

here

a

re th

e m

onth

ly re

turn

s of

portf

olio

12

12t

PRM

. The

est

imat

atio

n pe

riod

is th

e fiv

e-ye

ars e

vent

per

iod,

the

five-

year

s per

iod

befo

re th

e ev

ent,

and

an e

xpen

ding

per

iod

begi

nnin

g fiv

e ye

ars

befo

re th

e ve

nt. T

he se

ries

itα

ε+

and

its c

ondi

tiona

l var

ianc

e ar

e us

ed to

cal

cula

te th

e st

atis

tics.

Bol

d ita

lic c

hara

cter

s ind

icat

e th

at th

e em

piric

al re

ject

ion

rate

is

diff

eren

t at t

he 1

per

cent

leve

l fro

m th

e th

eore

tical

reje

ctio

n ra

te.

i

In

crem

ent

-3

0%-2

0%-1

0%0%

10%

20%

30%

Pane

l A: F

ama

and

Fren

ch M

odel

Es

timat

ion

over

the

even

t-per

iod

t-sta

t

99

.085

.833

.2

3.7

36.8

89.1

99.7

t-cro

ss

88.5

74.8

32.6

5.3

17.1

57.5

81.8

t-sta

ndar

d10

0.0

93.3

33.2

4.4

60.7

98.5

99.9

t-sta

ndar

dcr

oss

88.4

72.3

22.2

4.2

36.6

75.4

86.9

Estim

atio

n be

fore

the

even

t-per

iod

t-sta

t

99.1

83.1

30.3

2.

7 26

.684

.099

.1t-c

ross

90.2

73.6

34.1

5.9

10.1

46.4

74.8

t-sta

ndar

d99

.788

.730

.02.

7 36

.792

.799

.7t-s

tand

ard

cros

s88

.574

.431

.84.

417

.560

.981

.0Es

timat

ion

with

an

expe

ndin

g sa

mpl

e pe

riod

t-sta

t

99

.385

.5

31

.33.

0 27

.483

.799

.1t-c

ross

88.9

74.7

35.0

6.5

10.3

47.2

76.2

t-sta

ndar

d99

.588

.528

.62.

3 44

.395

.899

.4t-s

tand

ard

cros

s88

.872

.528

.63.

623

.467

.484

.6

Page 31: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

29

Tabl

e IV

(con

tinue

): Sp

ecifi

catio

n an

d Po

wer

of T

est S

tatis

tics w

ith C

alen

dar P

ortfo

lios i

n R

ando

m S

ampl

es

In

crem

ent

-3

0%-2

0%-1

0%0%

10%

20%

30%

Pane

l B: C

arha

rt M

odel

Es

timat

ion

over

the

even

t-per

iod

t-sta

t

98

.681

.721

.0

6.3

51.4

94.3

100.

0t-c

ross

86.7

66.2

24.7

4.5

26.1

66.1

82.9

t-sta

ndar

d99

.991

.525

.77.

8 68

.299

.310

0.0

t-sta

ndar

dcr

oss

87.8

66.7

17.3

6.5

44.9

78.7

88.7

Estim

atio

n be

fore

the

Even

t-per

iod

t-sta

t

95

.864

.612

.3

6.6

47.6

92.8

99.8

t-cro

ss

81.8

58.4

19.7

4.8

22.7

59.8

81.2

t-sta

ndar

d98

.573

.514

.08.

4 59

.398

.099

.9t-s

tand

ard

cros

s83

.761

.316

.15.

233

.170

.985

.3Es

timat

ion

with

an

Expe

ndin

g Sa

mpl

e-pe

riod

t-sta

t

97

.469

.4

11.4

5.8

48.2

93.5

100.

0t-c

ross

83.5

59.6

20.2

3.7

22.7

60.5

81.2

t-sta

ndar

d98

.775

.310

.89.

7 65

.798

.810

0.0

t-sta

ndar

dcr

oss

83.2

58.2

12.9

5.4

38.4

76.6

87.8

Page 32: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

30

Ta

ble

V: S

peci

ficat

ion

of A

ltern

ativ

e Te

st S

tatis

tics D

epen

ding

on

the

Freq

uenc

y of

the

Even

t with

Cal

enda

r Por

tfolio

s

In th

is ta

ble,

we

pres

ent t

he e

mpi

rical

reje

ctio

n ra

te o

f the

nul

l hyp

othe

sis (

no a

bnor

mal

retu

rns)

. It i

s cal

cula

ted

over

100

0 sa

mpl

es o

f firm

s whi

ch n

umbe

r is

dete

rmin

ed a

ccor

ding

to th

e tw

elve

-mon

ths p

ast m

arke

t ret

urns

. The

freq

uenc

y is

hig

h w

hen

mar

ket r

etur

ns a

re e

xtre

me.

The

firm

s are

dra

wn

rand

omly

ove

r the

in

itial

pop

ulat

ion

(ran

dom

Bea

rish

and

Ran

dom

Bul

lish)

and

ove

r the

stoc

ks w

hich

exp

erie

nced

an

extre

me

past

per

form

ance

(Bul

lish

Win

ner a

nd B

earis

h Lo

ser)

. The

firm

s are

hol

d a

five-

year

s per

iod

and

aggr

egat

e in

to 1

000

equa

lly-w

eigh

ted

portf

olio

s. Th

e fo

llow

ing

regr

essi

ons a

re e

stim

ated

(

)(

)an

d12

RR

hH

ML

RR

hH

ML

mPR

αit

fti

im

tft

it

it

itit

fti

im

tft

it

it

ii

itR

RsS

MB

RR

sSM

εα

βε

−=

++

+−

=+

++

+

−+

−+

whe

re

is th

e m

onth

ly re

turn

on

the

cale

ndar

-tim

e po

rtfol

io,

is th

e re

turn

on

the

thre

e-m

onth

Tre

asur

y bi

lls,

is th

e re

turn

of t

he m

arke

t por

tfolio

(CR

SP

valu

e-w

eigh

ted

inde

x),

is th

e re

turn

of t

he si

ze p

ortfo

lio,

itRft

Rm

tR

tSM

Bt

HM

L is

the

retu

rn o

f the

boo

k-to

-mar

ket p

ortfo

lio a

nd w

here

a

re th

e m

onth

ly re

turn

s of

portf

olio

12

tPR

12M

. The

est

imat

atio

n pe

riod

is th

e fiv

e-ye

ars e

vent

per

iod,

the

five-

year

s per

iod

befo

re th

e ev

ent,

and

an e

xpen

ding

per

iod

begi

nnin

g fiv

e ye

ars

befo

re th

e ve

nt. T

he se

ries

itα

ε+

and

its c

ondi

tiona

l var

ianc

e ar

e us

ed to

cal

cula

te th

e st

atis

tics.

Bol

d ita

lic c

hara

cter

s ind

icat

e th

at th

e em

piric

al re

ject

ion

rate

is

diff

eren

t at t

he 1

per

cent

leve

l fro

m th

e th

eore

tical

reje

ctio

n ra

te.

i

Mod

el

Fam

a an

d Fr

ench

(199

3)

Car

hart

(199

7)

Mar

ket

Bul

lish

Bea

rish

Bul

lish

Bea

rish

Bul

lish

Bea

rish

Bul

lish

Bea

rish

R

ando

m

R

ando

mW

inne

rLo

ser

Ran

dom

Ran

dom

Win

ner

Lose

r

Estim

atio

n ov

er th

e Ev

ent-P

erio

d t-s

tat

5.8

3.3

100.

010

0.0

4.7

8.1

99.9

100.

0t-c

ross

6.0

1.4

85.3

93.3

2.1

3.8

85.3

91.1

t-sta

ndar

d

6.8

6.2

100.

010

0.0

6.7

12.7

100.

010

0.0

t-sta

ndar

d cr

oss

4.7

4.7

87.1

93.4

4.0

6.8

85.8

91.6

Es

timat

ion

befo

re th

e Ev

ent-p

erio

d t-s

tat

4.0

1.3

99.4

100.

0 4.

0 8.

099

.910

0.0

t-cro

ss

7.4

0.9

74.4

91.9

3.0

3.6

79.8

92.1

t-sta

ndar

d

3.6

1.2

99.7

100.

06.

0 9.

210

0.0

100.

0t-s

tand

ard

cros

s 4.

6 0.

9

76

.292

.64.

35.

480

.691

.4

Estim

atio

n w

ith a

n Ex

pend

ing

Sam

ple-

perio

d t-s

tat

4.

21.

999

.9

10

0.0

4.1

7.7

99.9

100.

0t-c

ross

6.6

1.5

81.0

93.6

1.8

3.6

80.3

92.8

t-sta

ndar

d

3.

62.

310

0.0

100.

07.

314

.110

0.0

100.

0t-s

tand

ard

cros

s 3.

9 1.

2

84

.595

.04.

46.

084

.093

.3

Page 33: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

31

Tabl

e V

I: Po

wer

of A

ltern

ativ

e Te

st S

tatis

tics D

epen

ding

on

the

Freq

uenc

y of

the

Even

t with

Cal

enda

r Por

tfolio

s

In th

is ta

ble,

we

pres

ent t

he e

mpi

rical

reje

ctio

n ra

te o

f the

nul

l hyp

othe

sis (

no a

bnor

mal

retu

rns)

whe

n an

arti

ficia

l inc

rem

ent i

s add

ed to

the

retu

rns.

It is

ca

lcul

ated

ove

r 100

0 sa

mpl

es o

f firm

s whi

ch n

umbe

r is d

eter

min

ed a

ccor

ding

to th

e tw

elve

-mon

ths p

ast m

arke

t ret

urns

. The

freq

uenc

y is

hig

h w

hen

mar

ket

retu

rns a

re e

xtre

me.

The

firm

s are

dra

wn

rand

omly

ove

r the

initi

al p

opul

atio

n (r

ando

m B

earis

h an

d R

ando

m B

ullis

h) a

nd o

ver t

he st

ocks

whi

ch e

xper

ienc

ed a

n ex

trem

e pa

st p

erfo

rman

ce (B

ullis

h W

inne

r and

Bea

rish

Lose

r). T

he fi

rms a

re h

old

a fiv

e-ye

ars p

erio

d an

d ag

greg

ate

into

100

0 eq

ually

-wei

ghte

d po

rtfol

ios.

The

follo

win

g re

gres

sion

s are

est

imat

ed

()

()

and

12R

Rh

HM

LR

Rh

HM

Lm

PRα

itft

ii

mt

fti

ti

tit

itft

ii

mt

fti

ti

ti

iit

RR

sSM

BR

RsS

MB

βε

αβ

ε−

=+

++

−=

++

++

+−

+

whe

re

is th

e m

onth

ly re

turn

on

the

cale

ndar

-tim

e po

rtfol

io,

is th

e re

turn

on

the

thre

e-m

onth

Tre

asur

y bi

lls,

is th

e re

turn

of t

he m

arke

t por

tfolio

(CR

SP

valu

e-w

eigh

ted

inde

x),

is th

e re

turn

of t

he si

ze p

ortfo

lio,

itRft

Rm

tR

tSM

Bt

HM

L is

the

retu

rn o

f the

boo

k-to

-mar

ket p

ortfo

lio a

nd w

here

a

re th

e m

onth

ly re

turn

s of

portf

olio

12

tPR

12M

. The

est

imat

atio

n pe

riod

is th

e fiv

e-ye

ars e

vent

per

iod,

the

five-

year

s per

iod

befo

re th

e ev

ent,

and

an e

xpen

ding

per

iod

begi

nnin

g fiv

e ye

ars

befo

re th

e ve

nt. T

he se

ries

itα

ε+

and

its c

ondi

tiona

l var

ianc

e ar

e us

ed to

cal

cula

te th

e st

atis

tics.

i

Mar

ket

Bul

lish

Bai

ssie

rIn

crem

ent

-20%

-10%

10

%20

%-2

0%-1

0%

10%

20%

Pane

l A: F

ama

and

Fren

ch M

odel

Estim

atio

n ov

er th

e Ev

ent-P

erio

d t-s

tat

85

.533

.035

.588

.8

97.7

54.4

60.4

99.2

t-cro

ss

70.6

32.2

11.9

50.7

82.2

36.0

32.6

76.3

t-sta

ndar

d

92

.933

.161

.097

.999

.250

.485

.199

.9t-s

tand

ard

cros

s

68

.725

.029

.371

.381

.925

.457

.786

.1

Estim

atio

n be

fore

the

Even

t-per

iod

t-sta

t

81.8

31.4

25.2

81.3

97

.047

.148

.298

.3t-c

ross

71

.834

.79.

038

.281

.837

.519

.271

.6t-s

tand

ard

86.3

33.2

35.7

91.0

98.6

52.8

62.0

99.5

t-sta

ndar

dcr

oss

71.5

32.7

13.8

52.3

84.4

38.1

30.5

76.1

Es

timat

ion

with

an

Expe

ndin

g Sa

mpl

e-pe

riod

t-sta

t

83.7

32.2

25.7

82

.697

.752

.145

.398

.3t-c

ross

71

.935

.47.

738

.782

.939

.519

.370

.7t-s

tand

ard

86.6

30.0

45.5

93.7

98.3

46.0

71.7

99.9

t-sta

ndar

dcr

oss

71.6

28.1

17.7

57.7

82.5

32.1

40.7

81.1

Page 34: LONG RUN ABNORMAL STOCK PERFORMANCE OME … · long-run abnormal stock performance: some additional evidence j.f. bacmann a and m. dubois a first draft: february 2002 ... h car vs

32

Tabl

e V

I (co

ntin

ue):

Pow

er o

f Alte

rnat

ive

Test

Sta

tistic

s Dep

endi

ng o

n th

e Fr

eque

ncy

of th

e Ev

ent w

ith C

alen

dar P

ortfo

lios

Mar

ket

Bul

lish

Bai

ssie

rIn

crem

ent

-20%

-10%

10

%20

%-2

0%-1

0%

10%

20%

Pane

l B: C

arha

rt M

odel

Estim

atio

n ov

er th

e Ev

ent-P

erio

d t-s

tat

78

.923

.249

.094

.3

92.5

34.7

82.1

99.9

t-cro

ss

68.3

22.4

20.0

60.1

76.3

21.2

48.7

84.0

t-sta

ndar

d

90

.727

.168

.699

.398

.738

.193

.910

0.0

t-sta

ndar

dcr

oss

67.7

16.8

38.4

74.3

79.0

15.6

66.5

87.6

Es

timat

ion

befo

re th

e Ev

ent-p

erio

d t-s

tat

66

.315

.346

.492

.2

88.7

18.1

77.2

99.5

t-cro

ss

61.9

20.9

18.6

54.4

72.6

13.6

41.2

81.2

t-sta

ndar

d

72

.515

.559

.896

.592

.524

.685

.799

.9t-s

tand

ard

cros

s

61

.318

.226

.465

.374

.915

.351

.383

.3

Estim

atio

n w

ith a

n Ex

pend

ing

Sam

ple-

perio

d t-s

tat

69

.014

.146

.9

91.5

89.3

19.3

77.5

99.8

t-cro

ss

61.0

19.3

19.0

56.0

73.2

13.5

42.0

83.6

t-sta

ndar

d

73

.411

.866

.398

.192

.017

.791

.899

.9t-s

tand

ard

cros

s

58

.313

.131

.869

.274

.29.

959

.285

.0