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

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.