William A. Reese, Jr. Russell P. Robins A. B. Freeman School of Business Tulane University FEA Conference Sept. 25,

2  When there is an announcement of a corporate acquisition, the price of the firm being acquired usually goes up.  The price of the firm making the acquisition usually goes down  When an analyst upgrades a stock, it usually goes up in price  Initial Public Offerings (IPOs) of common stock are usually underpriced.

3  It is difficult to make money based on some surprising economic data a day or two after the data has been released.  Historically, on average, small-cap stocks do well in the month of January.  There are various types of momentum in stock returns (weekly, monthly, longer)  Investors tend to put more money into mutual funds that have recently performed well.

4  Each of these facts have been found by researchers through Event Studies  Plotting Cumulative Abnormal Returns (CARs) make Event Studies easy to explain and understand

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 We teach the facts  We show the graphs  We don’t teach the methodology  It can be complex  We don’t have students do their own Event Studies  What to do?  Time consuming 8

 Investments Course  Undergrad or MBA  Easy to Perform  Easy to Understand  Predictable Results 9

 Are there abnormal returns when a stock is added to the S&P 500?  Is there abnormal trading volume? 10

 Since October 1989, S&P has been announcing (when possible) changes to the index one week prior to the effective date  Index funds MUST buy the stock  May create upward price pressure 11

 Every stock that was added to the S&P 500 between January 2000 and July  Purged to leave 270 stocks that are still listed on Yahoo! Finance  Date of addition  Ticker symbol 12

 Macro that obtains data from Yahoo! Finance for stocks the student selects and S&P 500  42 days before the listing date  10 days after the listing date 13

 Event window is day -10 to day +10  Returns for stock and S&P are calculated for 30 days prior to event window  “Calculation Period” 14

 A regression estimates alpha and beta for each stock during calculation period: R i = α + β(R Mkt ) + e.  These estimates are used to calculate risk- adjusted expected returns during the event window: E(R)= α + β(R Mkt ) 15

 Abnormal returns are calculated: Abn. R i = R i - E(R i )  Cumulative Abnormal Returns (CARs) are the sum of all abnormal returns up to time t in the event window 16

 Cumulative Abnormal (Scaled) Volume is also calculated for the event window  Average volume during calculation period is established as “normal” volume  CARs and CAVs are averaged across stocks in the sample and T-stats are calculated. 17

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 Select a random set of stocks from our list  Enter their ticker symbols into spreadsheet  Click “Download”  Wait a couple of minutes  Depending on internet speed and number of stocks selected  Observe and analyze the results  Answer prepared questions  Come up with their own idea for an event study 20

 How an event study is done  How to calculate risk-adjusted returns using the market model  How to calculate and plot CARs  Reinforcement of averages, standard errors, t-stats, and statistical significance  How buying pressure can affect returns and volume 21

 The Spreadsheet and basic instructions can be found at 22