Event Study Methodology

Event study methodology measures the stock-market reaction to a discrete corporate event by isolating the portion of a firm's return that cannot be explained by normal market movements. Under semi-strong market efficiency, new information about an acquisition, earnings announcement, alliance, CEO change, or regulatory shock is impounded into prices almost immediately, so the abnormal return around the event date is a clean, forward-looking estimate of the event's value consequences. A. Craig MacKinlay's 1997 survey codified the canonical pipeline -- define the event and windows, estimate a normal-return benchmark, compute abnormal returns, accumulate them into a cumulative abnormal return (CAR), and test significance. Brown and Warner's 1985 study established the statistical properties of these procedures with daily data, showing when simple methods are well specified and how variance and clustering must be handled. The method is the workhorse for linking strategic decisions to shareholder value.