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March-April 2013

Econometrics 2
Homework Assignment 2
due by Saturday, April 13, 2013, at 14:00 (post to my.nes.ru) Late assignments lose 10 points per day No late assignments accepted after Tuesday April 11 at 14:00. Using data from Homework2_EventStudy_Data_March2013.xlsx (posted to my.nes.ru under HW 2 Event Studies and Volatility Measurement) which includes I/B/E/S summary estimate file and daily stock return data for the 50 active British securities with Earnings Per Share (EPS) consensus forecast data, please answer the following questions. The file contains summaries of available estimates a given points in time (STATPERS). Normally, you will get stronger results if you use the last consensus forecast before the actual announcement date (ANNDATS). I have already eliminated all but the last consensus forecast from the data. 1. A simple one event, event study. Choose any one of the events. These data are already screened to make sure that EPS and prices can be in different currencies. Surprise is the difference between the actual EPS announced (ACTUAL) and the consensus forecast divided by the price 10 to 15 days prior to the announcement. Usually, we use mean consensus forecasts (MEANEST), but sometimes we will also use the median forecast (MEDEST) when there is concern that there are overly extreme forecasts in sample. See the tab Estimates_and_Actuals-Last_Only which contains the consensus forecast data just prior to announcements (ANNDATS_ACT and ANNTIMS_ACT). a) Estimate normal returns for your firm/event for the period 20 days before your event to 20 days after your event using 3 methods: i) Average return (5 points) ii) Market Model (5 points) iii) 0-1 model (5 points) Use the period 200 trading days to 21 trading days before your event as the estimation period (for explanation refer to the lecture on Thursday, March 22 or the article posted to my.nes.ru by Kothari and Warner, 2004). b) Compute abnormal returns (5 points) and cumulative abnormal returns (5 points) for days [-1, +1] around the event date (t=0) and c) test whether the event had a significant impact on the value of the firm. Use at least two different models for normal returns. (10 points) d) Graph the cumulative abnormal returns from -20 trading dates before the event to +20 trading days after. Graph the 95% confidence error bands. (10 points) e) Why do we subtract the normal return from the stocks raw returns (give the economic intuition)? (5 points) f) Discuss economic intuition behind the findings. (5 points)

2. Often when accounting standards are low earnings announcements may not contain very much information. When insider trading is common, earnings announcements may not be very surprising. One way to see if these problems exist is to calculate the earnings response coefficient. It is a regression of the cumulative abnormal returns around the events on the magnitude of the surprise. I have already calculated for you the CARs from -1 to +1 around each of the events using the 0-1 model. Using all events (roughly 75): a. Calculate the scaled surprise as in question 1. (5 points) b. Create a list of all -1 to +1 cars sorted by the scaled surprise. Compute average CARs for i. positive and ii. negative surprises separately (5 points) 1. along with the (and best) test statistic (5 points) 2. explain your choice of test statistic (5 points) iii. Test whether there is a significant difference in CARs between the abnormal returns during event windows associated with positive and negative surprises. (5 points) {Hint: a two-sample t-test is probably the best test for testing the difference between negative and positive events. Bonus 3/100 points if you test whether the variances are statistically significant first. If you dont test whether the variances are the same, assume they are different.} c. Earnings Response Coefficient (ERC): The ERC tells you how much returns changed for a given amount of surprise. The ERC is the OLS beta from a regression of CARs on the magnitude of the surprise. Please calculate the Earnings Response Coefficient for these (roughly) 75 events (10 points). d. Discuss economic intuition of your findings. (5 points) e. When does the choice of model for normal returns matter and when does it not matter? No calculations just intuition. (5 points)