Valid Inference in Single-Firm, Single-Event Studies
Published in: American Law and Economics Review, Volume 15, Issue 2, pages 495–541 (Fall 2013). doi: 10.1093/aler/aht009
Posted on RAND.org on December 11, 2020
Single-firm event studies play an important role in both scholarship and litigation despite the general invalidity of standard inference. We use a broad cross-section of 2000–2007 CRSP data and find that the standard approach performs poorly in terms of both Type I and Type II error rates. We discuss a simple-to-use alternative, the SQ test, based on sample quantiles of the empirical distribution of pre-event fitted excess returns, which has correct asymptotic Type I error rate. Results suggest that the test will be useful in studying the impact of firm-specific events such as regulation, anti-trust rulings, and corporate or securities litigation.