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Conditional Methods in Event-Studies and an Equilibrium Justification for Standard Event-Study Procedures

By Nagpurnanand R. Prabhala

Abstract

The literature on conditional event-study methods criticizes standard event-study procedures as being misspecified, if events are voluntary and investors are rational. We argue, however, that standard procedures (i) lead to statistically valid inferences, under conditions described in the paper and (ii) are often superior means of inference, even when event-study data are generated exactly as per a class of rational expectations specifications introduced by the conditional methods literature. Our results provide an equilibrium justification for traditional event-study methods, and we suggest how these simple procedures may be combined with conditional methods, so as to improve statistical power in event-studies.

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