Event study

An Event study uses transactions data from financial markets to predict the financial gains and losses associated with newly disseminated information. For example, the announcement of a merger between two firms can be analyzed to make predictions about the potential merger-related changes to the supply and the price of the product(s) subject to the merger.

Motivation

The logic behind the event study methodology (within the specific context of mergers) is explained in Warren-Boulton and Dalkir (2001):

Investors in financial markets bet their dollars on whether a merger will raise or lower prices. A merger that raises market prices will benefit both the merging parties and their rivals and thus raise the prices for all their shares. Conversely, the financial community may expect the efficiencies from the merger to be sufficiently large to drive down prices. In this case, the share values of the merging firms’ rivals fall as the probability of the merger goes up. Thus, evidence from financial markets can be used to predict market price effects when significant merger-related events have taken place.

Methodologies

The general event study methodology is explained in, for example, MacKinlay (1997) or Mitchell and Netter (1994).

Warren-Boulton and Dalkir use an event-probability methodology originally developed by McGuckin et al. (1992) to be applied to merger analysis. Their specific methodology involves ex-ante calculation of the financial markets' assessment of the probability that the merger will indeed take place in the future.

Application to merger analysis

Warren-Boulton and Dalkir (2001) apply their event-probability methodology to the proposed merger between Staples, Inc. and Office Depot (1996), which was challenged by the Federal Trade Commission and eventually withdrawn.

Empirical methods

Warren-Boulton and Dalkir (2001) run a time-series regression. In addition, they also look at the effect of the merger in specific event windows.

Findings

Warren-Boulton and Dalkir (2001) find highly significant returns to the only rival firm in the relevant market. Based on these returns, they are able to estimate the price effect of the merger in the product market which is highly consistent with the estimates of the likely price increase from other, independent, sources.

References

• Mitchell, Mark L. and Jeffry M. Netter. "The Role of Financial Economics in Securities Fraud Cases: Applications at the Securities and Exchange Commission." The Business Lawyer February 1994
• MacKinlay, A. C. “Event Studies in Economics and Finance,” Journal of Economic Literature Vol. XXXV, (1997).
• McGuckin, R. H., F. R. Warren-Boulton, and P. Waldstein. “The Use of Stock Market Returns in Antitrust Analysis of Mergers,” Review of Industrial Organization Vol. 7 (1992).
• Warren-Boulton, F. and S. Dalkir. “Staples and Office Depot: An Event-Probability Case Study,” Review of Industrial Organization, Vol. 19, No. 4, (2001).