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What is the event study methodology ? Stock price reactions to announcements of corporate events (such as merger announcements) are measured by standard event study methodology. Under the assumption of semi-strong form market efficiency, the announcement effects provide an unbiased estimate of the market's valuation in response to the information contained in the announcement. For the 200-trading-day “estimation period” (which is t=-250 to -51, where t=0 is the event's announcement date), “market model” parameters are obtained by regressing individual daily returns on the corresponding equal-weighted daily market index returns, which are provided by the CRSP database. The market model is defined as: Rjt = j + jRmt + jt where: Rjt = rate of return for stock j on day t, Rmt = rate of return for the equal-weighted market index on day t, j the intercept, i.e., mean return which is not explained by the market, = j = stock j's sensitivity to the market’s return, jt = the error term. The predicted return for a firm on a day in the event period is the return predicted by the market model on that day using the estimates of j and j from the pre-event “estimation period”. That is, the predicted return for stock j on day t in the event window is: Rˆ jt ˆ j ˆj Rmt The abnormal return for stock j on day t in the announcement-event window is then defined as: ARjt = Rjt Rjt - The cumulative abnormal return (CAR) for stock j over the event window t = t1 to t2 is calculated as: t2 CARj,(t1, t2) = AR t t1 jt The average cumulative abnormal return (ACAR) over an event-window (t= t1 to t2) is the sum of the daily average prediction errors: ACAR 1 N CARjt N j 1 where N = the number of the companies in your sample.