Impact Of A Firm 's Announcements On The Same Company 's Stock Prices Essay

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Event studies focus on the impact of a firm’s announcements on the same firm’s stock prices. To a certain extent, when an event is unexpected, the magnitude of abnormal performance is a measure of the impact of that type of event on the wealth of a firm’s shareholders (Brown and Warner, 1980). To begin with, in this paper, we assume the impact is unbiased, which means this market is efficient. In an efficient market, the market price should be an unbiased estimate of the true value of the stock. However, market efficiency does not require the price to be completely matched with true value. Due to randomness, the price can either be under-estimated or over-estimated at any point of time. When there is an announcement, the changing of prices related to the announcement does not mean the market is inefficient. Martingale property theory assumes that knowledge of past events cannot help to predict future winning’s stock price. Only when this condition is satisfied, then the market is a fair game. There are three versions of efficient market hypothesis: weak-form efficiency (contains all past price information), semi-strong efficiency (contains all public information), and strong efficiency (contains all public and insider information). The better the price signal, the more info-efficient the market. Event studies provide a direct test to market efficiency. The day the information is released is generally defined as day zero. If we assume the event window is five days, then t =
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