Suppose the 11 days. c. For each of the

Suppose
that we wished to conduct an event study on whether acquiring firms experience
share price reactions to takeover announcements to test the market efficiency
theory. For our event study, we will use for our sample the following three
acquiring firms:

 

                      Company A: Merger announcement date
Jan. 15, 2006

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                      Company B: Merger announcement date
Feb. 15, 2006

                      Company C: Merger announcement date
Apr. 10, 2006

 

Suppose we
establish an 11-day testing period for returns around the event dates, the
event date plus 5 days before and 5 days after. The following table provides
our three acquiring firm stock prices during 12-day periods around merger
announcement dates:

  

Company A

Company B

Company C

Date

Price

Date

Price

Date

Price

1/09

50.125

2/09

20.000

4/04

60.375

1/10

50.125

2/10

20.000

4/05

60.500

1/11

50.250

2/11

20.125

4/06

60.250

1/12

50.250

2/12

20.250

4/07

60.125

1/13

50.375

2/13

20.375

4/08

60.000

1/14

50.250

2/14

20.375

4/09

60.125

1/15

52.250

2/15

21.375

4/10

60.625

1/16

52.375

2/16

21.250

4/11

60.750

1/17

52.250

2/17

21.375

4/12

60.750

1/18

52.375

2/18

21.500

4/13

60.875

1/19

52.500

2/19

21.375

4/14

60.875

1/20

52.375

2/20

21.500

4/15

60.875

a.      
Compute one-day returns for
each of 11 days for each of the three stocks.

b.        
Suppose that we have decided to
use the Mean Adjusted Return method to compute excess or abnormal stock
returns. Here, we will compute mean daily returns for each security for a
period outside of our 11-day testing period. Suppose we compute average daily
returns and standard deviations for each of the stocks for 180-day periods
prior to the testing periods (this raw returns data is not given here). Suppose
that we have found normal or expected daily returns along with standard
deviations as follows: 

Stock

Normal Return

Standard Deviation

A

.000465

.00415

B

.000520

.00637

C

.000082

.00220

Compute excess returns for each stock for each of the 11 days.

c. For each of the 11 days in the analysis, compute average
residuals for the three stocks. Then, for each day, compute a standard
deviation of residuals for the three stocks. Finally, compute normal deviates
for each of the 11 dates based on the averages and standard deviations for the
three stocks.