Supposethat we wished to conduct an event study on whether acquiring firms experienceshare price reactions to takeover announcements to test the market efficiencytheory. For our event study, we will use for our sample the following threeacquiring firms: Company A: Merger announcement dateJan. 15, 2006 Company B: Merger announcement dateFeb.

15, 2006 Company C: Merger announcement dateApr. 10, 2006 Suppose weestablish an 11-day testing period for returns around the event dates, theevent date plus 5 days before and 5 days after. The following table providesour three acquiring firm stock prices during 12-day periods around mergerannouncement 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.

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500 4/15 60.875 a. Compute one-day returns foreach of 11 days for each of the three stocks. b. Suppose that we have decided touse the Mean Adjusted Return method to compute excess or abnormal stockreturns. Here, we will compute mean daily returns for each security for aperiod outside of our 11-day testing period. Suppose we compute average dailyreturns and standard deviations for each of the stocks for 180-day periodsprior to the testing periods (this raw returns data is not given here). Supposethat we have found normal or expected daily returns along with standarddeviations 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 averageresiduals for the three stocks. Then, for each day, compute a standarddeviation of residuals for the three stocks. Finally, compute normal deviatesfor each of the 11 dates based on the averages and standard deviations for thethree stocks.