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RFS Advance Access published online on January 22, 2008
Review of Financial Studies, doi:10.1093/rfs/hhm090
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© The Author 2008. Published by Oxford University Press on behalf of the Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Endogenous Events and Long-Run Returns

S. Viswanathan
Duke University

Bin Wei
Zicklin School of Business, Baruch College, City University of New York

Address correspondence to S. Viswanathan, Fuqua School of Business, Duke University, Durham, NC 27708; telephone: 919-660-7784; e-mail: viswanat{at}mail.duke.edu.

JEL Classification: G14, G32


  Abstract

We analyze event abnormal returns when returns predict events. In fixed samples, we show that the expected abnormal return is negative and becomes more negative as the holding period increases. Asymptotically, abnormal returns converge to zero provided that the process of the number of events is stationary. Nonstationarity in the process of the number of events is needed to generate a large negative bias. We present theory and simulations for the specific case of a lognormal model to characterize the magnitude of the small-sample bias. We illustrate the theory by analyzing long-term returns after initial public offerings (IPOs) and seasoned equity offerings (SEOs).

Comments from an anonymous referee, Joel Hasbrouck, and Ravi Jagannathan have substantially improved the paper. We also thank Federico Bandi, Ravi Bansal, Geert Bekaert, Michael Brandt, Alon Brav, Michael Brennan, Ron Gallant, Larry Harris, Raymond Kan, Pete Kyle, Kai Li, Nagpurnanand Prabhala, Ehud Ronn, Ronnie Sadka, Paul Schultz, Ken Singleton, Bhaskar Swaminathan, and seminar participants at Boston College, Duke, Northwestern, Notre Dame, the 2004 EFA meeting at Maastricht, the 2004 FEA conference at USC, and the 2005 WFA conference at Portland, Oregon, for their comments and discussions. All errors are our own.


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