A Beginner's Guide to Event Studies

Abstract

The event study is a type of research that is appearing more frequently in financial services studies to measure the impact of regulatory events. During the 1980s, the methodology gained widespread use and acceptance as an important research tool in the field of finance. The availability of both personal computers and digitalized databases made event studies both popular and useful in examining the impact of any one of a myriad of events on stockholder returns. Event studies attempt to measure abnormal changes in stock prices of publicly traded companies that occur in conjunction with an event such as the announcement of new regulatory initiatives. The purpose of the event study is to detect whether financial markets react positively or negatively to these initiatives. For example, several researchers have attempted to measure the effect of the Financial Services Modernization Act on stock prices of banks and insurance companies. Stock prices reflect investors' perceptions of future earnings of a firm as well as its level of risk. While the event study methodology is a useful and powerful tool for economic analysis, it does have its limitations. In some cases, the event study methodology may not be the appropriate model to evaluate a particular event.