Page 87 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 1, 2015, pp. 61-94

After we have obtained the abnormal returns of every security and benchmark

market index, we can calculate cumulative abnormal returns (CARs) by using

following:

Afterwards, the CARs are testes for statistical significance level. The null

hypothesis establishes that event chosen for the analysis does not have any effect of

the stock prices of a security engaged in M&A deal. The CAR under null hypothesis

is measured according to formula (MacKinley 1997):

Advantages of event study approach:

• Variables impacting macroeconomic outlook are constant

• Minor standard errors

• Evades endogeneity issues

• Immediate incorporation of M&A announcement into stock prices (may take

month to measure using accounting approach)

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