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An Event Study Measures Economic Effect Of Corporate Event On Security Price

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An event study measures economic effect of a specific corporate event or economy wide event on the share price of the firm, it dominates the empirical research. Typically, it examines the wealth effects and price effect of corporate event on security price around first announcement date. In the event study, the basic assumption is that market is semi-strong form efficient which ensures corresponding price movement with regards to new corporate information. Event study has abundant applications in the long history since the first published paper by James Dolley (1933). There are several types of return generated by event study, including observed return, abnormal return and expected return.

The methodology and explanation of event study on the wealth effect of spin-offs varies, most of empirical researches are consistent with the positive abnormal stock return of spin-offs for the parent company stockholder. The positive stock gains are associated with the positive expectation of prospective parent company. Prior empirical research has documented to provide extensive evidence for this gain. Hite and Owers (1983), Schipper and Smith (1983) Miles and Rosenfeld, (1983), Linn and Rozeff (1985), Copeland, Lemgruber, and Mayers (1987), Vijh (1994), Krishnaswami and Subramaniam (1999) and McConnell et al. (2001) confirmed the range of positive abnormal return for spun-off firms and their parents from 2.9 percent to 3.3 percent to spin off announcement. Hemang Desai, Prem C. Jain
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