Event study: Market-adjusted return model

We replicate the event study method by using the market-adjusted return model. Ba-sically, the abnormal return is calculated as the observed stock return less the market return as shown earlier in Section 5.4.3. The abnormal return using market-adjusted

return model is as follows,

ε_i,t = r_i,t − r_m,t (6.4)

where r_i,t is the observed stock return and r_m,t is the observed market return on day t using the KLCI index as the market return. The CAR observed in the event window is compared with the ones in the estimation period.

Similar with the market model, we begin by focusing on the release day of the analysts’

initial reports. The mean abnormal return for the participating group on the event day using the market-adjusted return model is −0.178%. The standard error of the one-day participating group mean abnormal return is 0.256%, and therefore it gives the t-test statistics of -0.694. The result is the same with the one using the market model in which the null hypothesis is not rejected. It means that the event has no significant impact on the participating group on the event day. The standardised t-test statistics of the abnormal return on the event day t=0 is −0.763, while the rank test statistics is −0.240, which means that all the test statistics on the event day are not significantly different from zero. Therefore, the release day of the financial analysts’ reports does not contribute to positive returns based on the market-adjusted return model.

As for the control group, the event day mean abnormal return using the market-adjusted return model is −0.298%, and with a standard error of 0.220%, it leads to the t-test statistics equal to −1.354. Similarly, the null hypothesis that the event has no impact on the control group is not rejected at the 5% significant level. It is an indication that the release of the analysts’ initial reports is not an important or value relevant event because there is no significant abnormal return observed on the event day using two models of event study.

Figure 6.4 compares the CARs between the participating companies and the con-trol group based on the market-adjusted return model using the longer event window [−120, 120]. We find that both CARs in the participating companies and the control group are moving downtrend and the negative CARs are statistically significant from zero in most days in the event window. The pattern of both CARs are very similar and closer with each other, hence the difference of CARs between the participating companies and the control group is not statistically significant in the entire event window. Even

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Figure 6.4: CAR market-adjusted model - participating vs. control

though the negative CARs in each group of companies are statistically significant, the downtrend of CARs in both group does not show evidence that there is a growing build-up of positive CARs. It reflects that there is no evidence of leaking of information or insider trading prior to the event day. Furthermore, we do not observe a significant price jump on the event day or a day after the release of the analysts’ initial reports. Therefore, there is no evidence that the release of the analysts’ initial reports is an informative and important event.

We replicate the analysis using a shorter event window [−30, 30]. We find that the pattern of CARs is of no different from the one using a longer event window as shown in Figure 6.5. There is also no clear price jump upon the event date or a growing build-up of positive CARs prior to the event as shown in the literature review (e.g. Figure 4.2 and Figure 4.3). As expected, the difference of CARs between the participating companies and the control group is also not statistically significant from zero in most of the days in the entire window. It means that the null hypothesis that the CARs between the participating companies and the control group are equal cannot be rejected.

Accordingly, the model of abnormal return using the market-adjusted return model

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Figure 6.5: CAR market-adjusted model - participating vs. control (shorter window) indicates that there is not enough evidence that the release of analysts’ initial reports is an informative and financially related event. Although we have verified earlier that the release of analysts’ initial reports is the only important event during the event window [−30, 30] for most companies in the participating group, the evidence from the market-adjusted abnormal return model does not support that it is an important event that would contribute to positive CARs. As such, the evidence suggests that the information leaking or insider trading prior to the event is not supported.

In summary, we find that there is no clear evidence that the release of the analysts’

initial reports is an important, informative and value related event which basically means it is a non-event day. Initially it appears that there is a tendency of leaking of information or insider trading prior to the event day as shown by the building-up of positive CAR in the event window [−120, 120] based on the market model. However, the test statistics show that the difference of CARs between the participating companies and the control group are not statistically significant using two models of event study. Further evidence using a shorter event window [−30, 30] based on the two models of event study also do not reject the null hypotheses that the CARs for the participating companies and the

control group are equal.

As the shorter event window has been checked and verified, there are no other major events that could have confounding effects that had occurred in the same event window, so the significantly positive CAR of market model prior to the event day in the longer event window [−120, 120] could be due the effects of other events. Therefore the hypothesis that there is a leakage of information or insider trading prior to the event is not supported.

Since the hypothesis that the leaking of information or insider trading prior to the event day is not supported, it means that the market is efficient. However, if the market is efficient, then there will be a significant impact upon the event day, otherwise the event is not really an event. Using two models of event study, we do not find enough evidence that there is any significant impact on the event day or a day after. It means that the release of analysts’ initial reports is not really an important nor an informative event.

Although the pattern of CAR using a longer event window [−120, 120] based on the market model does not match with the one based on the market-adjusted return model, the significance tests on the event day reveal the same results, i.e. all the test statistics of the abnormal return on the event day is not significant using both models. Furthermore, the test statistics show that the difference of CARs between the participating companies and the control group are not statistically significant from zero. In addition, the shorter event window [−30, 30] reveals a similar pattern of CARs between the market model and market-adjusted return model. This means that the results of models of event study we used are comparable.

The CAR of the control group is also comparable with the participating group despite the difference in the composition of companies in each group. As there is no significant impact observed, there is no conclusive evidence that the release of analysts reports is a significant event nor that there is any new information content in the analysts’ initial reports. Table A.2 in Appendix A.7 shows the test of significance of CAR based on the market-adjusted return model in the event window [−30, 30] for the participating companies using t-test statistics, standardised t-test statistics and rank statistics.