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Abstract
This paper performs a classical market-model event study controlling for nonsynchronous trading and volatility clustering. In contrast to many international event studies, this paper focuses on differences created by non-synchronous trading and conditional heteroscedasticity applying OLS and ARMA-GARCH market model specifications. The results suggest that non-synchronous trading and volatility clustering induce new market insight. We find no significant prior announcement effects, sustained higher post announcement abnormal returns for selling firms and no overall significant abnormal returns for acquiring firms. These results induce changes in event study inferences suggesting a need for a rework of many classical event studies.
Classification: c32, c52
Keywords: Event-studies, Mergers and Acquisitions, Non-synchronous trading, Volatility Clustering.
1. Introduction and literature review
In economics and finance an important measurement is the effects of an economic event on the value of a firm. Such a measure can be constructed using an event study. Using financial market data, an event study measures the impact of a specific event on the value of the firm. The usefulness of such a study comes from the fact that, given rationality in the marketplace, the effects of an event will be reflected immediately in the security prices. Thus a measure of the event's economic impact can be constructed using security prices over a relatively short time period. In contrast, direct productivity related measures might require many months or even years of observations. The event study has many applications and especially in economics and financial research, event studies have been applied to a variety of firm specific and economic wide events. In this paper we intend to apply the event study methodology for a sample of mergers and acquisitions in the thinly traded Norwegian equity market1.
Event study methodology has a long history, which perhaps started by James Dolley's (1933) stock split study. The level of sophistication of event studies increased from the early 1930s until the late 1960s. Examples are John H. Myers and Archie Bakay (1948), C. Austin Barker (1956, 1957, 1958), and John Ashley (1962). The improvements included removing general stock market price movements and separating out confounding events. Ray Ball and Phillip Brown (1968) and Eugene Fama et al. (1969) conducted seminal studies in the late 1960s. These introduced the methodology...