Today the most common way of testing for the presence of abnormal stock market returns is by following the pioneering work of Fama, Fisher, Jensen, and Roll (1969). Their benchmark approach examines whether or not the stochastic behavior of firms' market-conditional returns is significantly affected by some specific event like an earnings announcement, CEO's death, or brokerage house recommendation. Under certain conditions, though, it may also be possible to test for abnormal returns by using analysis of covariance. This approach has been used extensively to test for experimental - and control-group differences in such diverse areas as applied psychology, entrepreneurship, cost accounting, and business ethics. However, covariance analysis does not appear to have been widely used as an event-study methodology in finance-related areas. As an alternative to the benchmark approach, though, it offers sufficient power to accommodate event-related investigations. Moreover, it offers a degree of flexibility, especially in controlling extra-market factors, the benchmark approach may sometimes lack.
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