Equities

Managerial Decisions and Long-Term Stock-Price Performance

Topics - Equities

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Managerial Decisions and Long-Term Stock-Price Performance

A rapidly growing literature claims to refute the efficient-market hypothesis by producing large estimates of long-term abnormal returns following major corporate events. The preferred methodology in this literature is to calculate average multiyear buy-and-hold abnormal returns and conduct inferences via a bootstrapping procedure.

This article reexamines the reliability of recent long-term stock price performance estimates using three large well-explored samples of major corporate events. We find that the popular approach of measuring long-term abnormal performance is not an adequate methodology because it assumes independence of multiyear event-firm abnormal returns. We show that event-firm abnormal returns are positively cross-correlated when overlapping in calendar time.

As such, assuming independence is problematic for any long-term abnormal performance methodology. Moreover, this is likely to be a problem for most event samples, not just the mergers, seasoned equity offerings and share repurchases examined in this article, since major corporate actions are not random. As a result, we strongly advocate a methodology that accounts for the dependence of event-firm abnormal returns, such as the calendar-time portfolio approach.

The primary implication of our results is that most of the evidence against market efficiency contained in recent studies measuring significant long-term abnormal returns following major corporate events is largely irrelevant because these studies assume independence. Our estimates of long-term abnormal performance that account for the positive cross-correlations of event-firm abnormal returns produce very little evidence of long-term abnormal performance.

Merton Miller Prize 2000

Published in

Journal of Business

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

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