Bess em Binder Zhang

Journal of Financial Economics 109 (2013) 83102
Contents lists available at SciVerse ScienceDirect
Journal of Financial Economics

journal homepage: www.elsevier.com/locate/jfec
Firm characteristics and long-run stock returns after

corporate events$
Hendrik Bessembinder n, Feng Zhang 1
University of Utah, David Eccles School of Business, 1655 E. Campus Center Drive, Salt Lake City, UT 84112, USA
a r t i c l e i n f o abstract
Article history: The well-documented abnormal long-run buy-and-hold returns to rms issuing equity in
Received 22 September 2012 initial public offerings and seasoned equity offerings, rms bidding in mergers, and rms
Received in revised form initiating dividends can be attributed to imperfect control-rm matching. In addition to
3 December 2012
rm size and market-to-book ratio, event rms on average differ from control rms in
Accepted 6 December 2012
Available online 13 February 2013
terms of idiosyncratic volatility, liquidity, return momentum, and capital investment,
each of which also explains returns. We propose a simple regression-based approach to
JEL classication: control for differences in rm characteristics across event and control rms, and we
G14 show that long-run abnormal returns do not differ signicantly from zero for event rms
G32
in the 1980 to 2005 period. The returns to event rms are, therefore, consistent with
G34
patterns known to exist for the broad stock market and do not require event-specic
G35
explanations.
Keywords: & 2013 Elsevier B.V. All rights reserved.
Firm characteristics
Long-run stock returns
BHARs
Wealth relative
Calendar time portfolio method
1. Introduction mean abnormal time series returns to portfolios of event

rms. Table 1 summarizes some studies that have applied
Two approaches have commonly been employed to these methods to a sampling of corporate events, includ-
measure long-run abnormal stock returns after corporate ing bidding rms in mergers, rms engaged in initial
events. The buy-and-hold abnormal return (BHAR) public offerings (IPOs) and seasoned equity offerings
method is based on the difference between buy-and- (SEOs), and rms that initiate cash dividends.
hold returns to event rms as compared with control The studies summarized on Table 1 highlight two impor-
rms. The calendar time portfolio approach focuses on tant empirical regularities. First, long-run abnormal returns
are often large in absolute terms. In particular, Loughran and
Ritter (1995) nd ve-year BHARs averaging 59% for SEO
$ rms and 51% for IPO rms. Second, the BHAR and
We thank the referee (Eugene Fama) and seminar participants at
Hautes Etudes Commerciales de Paris, EDHEC Business School, the calendar time portfolios sometimes produce conicting
University of Utah, the University of Alberta Frontiers in Finance results. For example, Eckbo, Masulis, and Norli (2007) study
Conference, and the University of British Columbia Summer Finance rms that issued secondary and initial offerings of common
Conference for valuable comments. stocks during the 1980 to 2000 period and report signicant
n
Corresponding author. Tel.: 1 801 581 8268.
E-mail addresses: nhb@business.utah.edu (H. Bessembinder),
ve-year BHARs of 29.7% and 18.0%, respectively, while
feng.zhang@business.utah.edu (F. Zhang). abnormal returns to calendar time portfolios for the same
1
Tel.: 1 801 587 9476. samples are small and statistically insignicant.
0304-405X/$ - see front matter & 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jneco.2013.02.009
84 H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102
Table 1
Summary of ndings in the related literature.
This table summarizes the empirical ndings of selected previous studies on the long-run stock performance of event rms after mergers and
acquisitions (M&As), seasoned equity offerings (SEOs), initial public offerings (IPOs), and dividend initiations. Some of the data are reproduced from
Eckbo, Masulis, and Norli (2007). These studies report the three- or ve-year buy-and-hold abnormal returns (BHARs) of the event rms and/or Jensens
alpha of monthly portfolio of the event rm. Superscript nnnindicates that the BHAR or the alpha is statistically signicant at the 1% level. aindicates that
statistical signicance level is not reported. bindicates that the benchmark is size- and book-to-market (BM)-based stock portfolio, not size- and BM-
matched individual control rm. cindicates that the benchmark is market return. dindicates that the benchmark is size- and momentum-matched
control rm.
Author(s) Sample Sample Firm or deal Holding Equal-weighted Alpha - calendar

period size type period (years) BHARs (%) time portfolio (%)
Panel A: M&As
Loughran and Vijh (1997) 19701989 385 Stock M&As 5 24.2nnn
Loughran and Vijh (1997) 19701989 196 Cash M&As 5 18.5
Loughran and Vijh (1997) 19701989 207 Mixed M&As 5 9.6
Loughran and Vijh (1997) 19701989 788 All 5 6.5
Rau and Vermaelen (1998) 19801991 2,823 Mergers 3 4.04
Rau and Vermaelen (1998) 19801991 316 Tender offers 3 8.85
Moeller, Schlingemann, and Stulz (2004) 19802001 12,023 All 3 0.18
Harford (2005) 19812000 All 0.25
Betton, Eckbo, and Thorburn (2008) 19802003 11,483 All 5 21.9nnn 0.08
Panel B: SEOs
Loughran and Ritter (1995) 19701990 3,702 All 5 59.4a
Spiess and Afeck-Graves (1995) 19751989 1,247 All 3 22.8nnn
Jegadeesh (2000) 19701993 2,992 All 5 34.3nnn 0.31nnn
Brav, Geczy, and Gompers (2000)b 19751992 3,775 All 5 26.3a 0.19
Eckbo, Masulis, and Norli (2007) 19802000 4,971 Industrial 5 29.7nnn 0.18
Fu, Huang, and Lin (2012) 19802002 5,062 All 3 12.67nnn 0.40nnn
Fu, Huang, and Lin (2012) 20032010 1,583 All 3 4.65 0.19
Panel C: IPOs
Loughran and Ritter (1995) 19701990 4,753 All 5 50.7a
Brav and Gompers (1997)b 19761992 934 Venture-backed 5 16.5a 0.07
Brav and Gompers (1997)b 19751992 3,407 Non-venture-backed 5 0.9a 0.52nnn
Brav, Geczy, and Gompers (2000)b 19751992 3,501 All 5 6.6a 0.19
Eckbo, Masulis, and Norli (2007) 19802000 5,018 Industrial 5 18.0nnn 0.16
Panel D: Dividend initiations

Michaely, Thaler, and Womack (1995) 19641988 561 All 5 24.8nnn,c
Boehme and Sorescu (2002) 19271998 1,645 All 3 21.7nnn,d 0.21
The BHAR method is most commonly implemented rms, and dividend-initiating rms, during the 1980 to
using control rms matched to event rms on the basis of 2005 period. These results are important because they
rm characteristics, in particular size and book-to-market show that the apparently large abnormal returns to event
(BM) ratio. However, we show that event rms often rms do not reect unique effects of the events per se, but
differ signicantly from their size- and BM-matched rather reect characteristics of the rms engaging in the
counterparts in terms of other rm characteristics, includ- events and return patterns that have been found for
ing idiosyncratic volatility, illiquidity, market beta, return equities in general, and they largely reconcile the appar-
momentum, and capital investment. Differences in these ent differences in inferences across the BHAR and calen-
characteristics are potentially important in assessing dar time portfolio methods.
abnormal returns, because the literature has linked each
to cross-sectional variation in stock returns. 2. The related literature
In principle, the issue could be addressed by selecting
control rms on the basis of additional rm character- The BHARs reported in a number of studies seem to
istics. However, the quality of the matches is likely to imply a striking degree of market inefciency. However,
degrade rapidly as the number of matching characteristics any study of abnormal returns must compare realized
is increased. We instead assess abnormal returns based on returns with a benchmark model of normal returns.
the intercept obtained in regressions of differences in Our collective understanding of normal returns remains
monthly log returns across event and control stocks on imperfect, which is the bad model problem discussed by
standardized differences in relevant rm characteristics. Fama (1998). Imperfect assessment of normal benchmark
The empirical results show that allowing for differ- returns is of minor importance over short horizons such
ences between event and control rms in additional rm as a few days. In contrast, as Kothari and Warner (2007)
characteristics, including idiosyncratic volatility, illiquid- emphasize, the issue can be of rst-order importance over
ity, return momentum, and capital investment, explains the horizons considered in long-run return studies.
essentially all of the apparent abnormal returns to event The rationale for selecting characteristic-matched con-
rms, including IPO rms, SEO rms, merger bidding trol rms when implementing the BHAR method is
H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102 85
expressed by Loughran and Ritter (2000, p. 364), who note The results reported here are related to, but distinct
that when testing an anomaly, it is a legitimate empirical from, ndings reported by other authors. Eckbo, Masulis,
question to ask whether a pattern is distinct from other and Norli (2000) note that the negative BHARs observed
cross-sectional patterns such as size and book-to-market, for SEO rms in earlier studies potentially arise because
or merely a manifestation of those patterns. We extend event rms differ from matched rms in terms of sensi-
their reasoning, as the literature has identied character- tivity to an array of macroeconomic risks. Consistent with
istics in addition to size and book-to-market that are this interpretation, they estimate time series regressions
successful in explaining variation in average stock of zero-investment portfolio (long event rms and short
returns. control rms) returns on macroeconomic factors and
Specically, we nd that event rms, including rms report some signicant slope coefcients. However, they
initiating dividends, rms bidding in mergers, IPO rms, estimate insignicant intercepts for portfolios of event
and rms issuing seasoned equity, differ signicantly rms and portfolios of control rms as well, implying that
from their size- and BM-matched counterparts in terms abnormal returns are zero for both SEO and control rms.
of idiosyncratic volatility, illiquidity, market beta, return Their study, therefore, highlights the tension between
momentum, and capital investment, each of which has results obtained by studying calendar time portfolio
been linked to cross-sectional variation in stock returns. alphas versus studying BHARs relative to matched rms.
Ang, Hodrick, Xing, and Zhang (2006), among others, We show how this tension can be resolved.
show that idiosyncratic volatility is negatively associated Zhang (2005), Carlson, Fisher, and Giammarino (2006),
with mean returns. Amihud and Mendelson (1986) and and Li, Livdan, and Zhang (2009) all observe that rms
Amihud (2002), among others, nd that illiquidity is tend to make larger capital investments after equity
positively associated with mean stock returns. Numerous offerings, implying that SEO and IPO rms differ from
studies, commencing with Jegadeesh and Titman (1993), size- and BM-matched control rms in terms of capital
nd that rms with relatively high recent returns tend to spending. Lyandres, Sun, and Zhang (2008) show that
continue earning high returns in the intermediate term. adding an investment factor to the three Fama and French
Cooper, Gulen, and Schill (2008) show that rms making factors signicantly reduces the abnormal returns to
large capital investments are reliably associated with equity-issuing rms estimated by the calendar time
lower average stock returns. Our regression-based portfolio method. However, they nd that matching on
method shows that differences across event and control investment in addition to size and BM does not fully
rms in these rm characteristics explain essentially all of explain the negative BHARs after SEOs. Butler and Wan
the abnormal returns after the four types of corporate (2010) show that rms that issue debt securities are more
events we study. liquid than their size and BM-matched control rms,
Our results are not denitive on the issue of market which complements our nding that rms issuing equity
efciency around these events, as the BHARs are and merger bidding rms are more liquid than their
explained on the basis of market-wide return regularities, matched control rms.
including those associated with idiosyncratic volatility We rene the BHAR method by focusing on monthly
and momentum, which are themselves not fully under- log returns, and we extend the evidence to a broad cross
stood. Instead, our results highlight that the long-run section of rm characteristics and to an array of corporate
returns to event rms are not unique in light of obser- events. The method introduced and insights obtained here
vable characteristics of the rms undergoing the events. potentially apply to studies of other corporate events such
It is reasonable to ask why it is useful to rene the as stock splits, exchange listings, dividend omissions, CEO
BHAR approach to measuring long- run returns, when an succession, and divestitures.
alternative method is available. However, the calendar
time portfolio approach is itself subject to criticism. Lyon, 3. Data and methods
Barber, and Tsai (1999) show that the calendar time
method is misspecied in nonrandom samples, while In this section we describe the sample selection
the BHAR approach is relatively robust. Further, the methods employed in this study, and present descriptive
method relies on ordinary least squares (OLS) regressions, statistics regarding sample rm characteristics.
with portfolio returns as the dependent variable.
Asparouhova, Bessembinder, and Kalcheva (2012) show 3.1. Sample selection
that such regressions are subject to a version of what
Barber and Lyon (1997) refer to as rebalancing bias. In We identify mergers and acquisitions completed by US
contrast, buy-and-hold returns are largely free of such public companies from 1980 to 2005 using Thomson
bias and directly reect investors actual experience. Financials SDC database. The sample ends in 2005 to
Further, Loughran and Ritter (2000) show that the calen- allow a ve-year period to measure post-event stock
dar time portfolio approach has low power to detect returns. We impose two lters that follow Betton, Eckbo,
abnormal returns, because the method effectively weights and Thorburn (2008). First, the acquisition must take the
each period equally, while corporate events tend to form of merger (SDC deal form M), acquisition of majority
cluster in certain time periods. Because neither the BHAR interest (AM), acquisition of remaining interest (AR),
method nor the calendar time portfolio method is perfect, or acquisition of partial interest (AP). Second, the acquisi-
it is valuable to continue to rene both methods and to tion must be a control bid, in which the acquirer owns
assess the consistency of results across methods. less than 50% of the target and intends to hold more than
50% of the target after the acquisition. In addition, we process identies 1,092 dividend initiations. For each
require the relative size of the deal (transaction size dividend-initiating rm, we identify a comparable rm
divided by the market value of the bidder rm before based on size and book-to-market at the end of the
deal completion) to be greater than 5%, and the transac- December prior to the announcement of dividend initia-
tion value to be more than $5 million, to exclude small tion, using the same matching procedure for M&As and
deals that are less likely to have material impacts. We are SEOs as described above. We are able to identify a
able to identify 4,748 such transactions. matching rm for 887 dividend-initiating rms.
We identify matching rms for the mergers and Table 2 reports the number of event rms on an annual
acquisitions (M&A) sample using a procedure similar to basis. The number of M&A deals is small before 1984 due
Loughran and Ritter (1995), Barber and Lyon (1997), and to the limited coverage of the SDC database. The number
Eckbo, Masulis, and Norli (2000). Each matched rm is of IPOs jumps substantially in the 1990 s to a peak of 795
selected as the rm with the closest book-to-market ratio in 1996, before declining to less than one hundred per
among rms with market capitalization between 70% and year in 2001 to 2003.
130% of the bidder rm. Market capitalization is mea-
sured as of the December prior to the deal, and BM is the 3.2. Characteristics of event and control rms
ratio of the book value of common equity at the end of
scal year t 1 to the market value of common equity at The matching of event with control rms on the basis
the end of year t 1. To be included, the matching rm of rm size and BM ratio is reasonably standard in the
must not be in our sample of bidders during the ten years literature on long-run returns.3 However, as we demon-
around the M&A deal completion date. We are able to strate, rms matched on these characteristics are not
identify matching rms for 3,972 sample bidder rms. necessarily well matched on other characteristics.
To form the SEO sample, we rst identify all completed We construct a measure of idiosyncratic volatility
SEOs in the SDC database during the 1980 to 2005 period. following Ang, Hodrick, Xing, and Zhang (2006), as the
Following Eckbo, Masulis, and Norli (2007), we exclude annualized standard deviation of the residuals in monthly
American Depository Receipts, Global Depository regressions of daily stock returns on the three Fama and
Receipts, unit offerings, nancial companies, and public French (1993) factors. We measure illiquidity following
utilities. For each of the 7,204 such deals we select as a Amihud (2002). In particular, for each stock and for each
match the rm with the closest BM ratio among rms of the 60 months before and after the corporate event, we
whose rm size is between 70% and 130% of the SEO rm compute illiquidity as the average of the daily ratio of
at the end of December preceding the SEO.2 To be absolute stock return to dollar trading volume. Following
included, the matching rm must not be in our sample Lyandres, Sun, and Zhang (2008), we measure investment
of SEO rms during the ten years around the equity as the annual change in gross property, plant, and equip-
offering date. We are able to identify matching rms for ment plus inventory, divided by assets at the beginning of
5,131 of the SEO offerings. the scal year. Investment during July of year t to June of
We identify all completed IPOs in the SDC database year t 1 is calculated using the accounting data of scal
over the period 1980 to 2005, excluding Real Estate year t. Return momentum is computed as the cumulative
Investment Trusts, closed-end funds, and American return from the 12th month to the second month prior to
Depository Receipts, of which there are 9,035. The that month. Market beta is estimated for each rm in each
matched rm sample is formed following Loughran and of the 120 months around the corporate events by
Ritter (1995). Each IPO rm is matched with the rm implementing the market model in daily stock returns.
having the closest but greater market capitalization at the Figs. 14 display monthly sample median rm character-
end of December following the IPO. To be included, the istics for bidding rms, SEO and IPO rms, and dividend
matching rm must have been publicly traded for more initiating rms, as well as their matched control rms.
than ve years. We are able to identify matching rms for Focusing rst on Fig. 1, which displays cross-sectional
8,966 of the IPO rms in our sample. median rm characteristics for bidding and matched
Finally, to form the dividend initiation sample, we rms, we observe that bidding rms have greater median
follow Michaely, Thaler, and Womack (1995) and idiosyncratic volatility than their matched rms. The
Boehme and Sorescu (2002). Firms initiating cash divi- median illiquidity of bidding rms is always smaller than
dends between 1980 and 2005 are identied from the that of their matching rms over the 24 months before
Center for Research in Security Prices (CRSP) daily stock the event and the 60 months after the event. Bidding
event le, subject to the criteria that the security is rms also have larger market betas, higher return
common stock (share code is 10 or 11), is listed on the momentum over the 24 months before and the 6 months
New York Stock Exchange, the American Stock Exchange, after the event, and greater capital investment from the
or NASDAQ, and has been included on CRSP for more than sixth to the 30th month after the event.
two years and that the frequency of dividends is monthly, Fig. 2 plots the same information for SEO sample rms
quarterly, semiannual, annual, or unspecied. This and their matched control rms. The SEO rms have
2 3
For each SEO, IPO, bidder and dividend initiation sample, if a Additional matching characteristics, including industry or past
matching rm delists, then the candidate matching rm with the next stock returns, have been used in some studies. For example, Ritter
closest book-to-market ratio is added for the remainder of the 60 month (1991) identies matching rms for IPO rms based on size and
period. industry.
Table 2 rms exceeds that of control rms by the event date and
Number of event rms. thereafter. The median size of SEO rms increases in the
This table presents the number of mergers and acquisitions (M&As),
months before the SEO and substantially exceeds that of
seasoned equity offerings (SEOs), initial public offerings (IPOs), and
dividend initiations in our sample, by year. the matched sample throughout the post-event period.
In contrast, the median size of IPO rms is considerably
Year M&A SEO IPO Dividend less than that of control rms during most of the post-
event period.
1980 1 184 99 25
1981 9 186 263 26
To summarize, Figs. 14 show that the event rms
1982 1 210 94 13 differ from their matched comparable rms in terms of
1983 0 500 588 17 average idiosyncratic volatility, illiquidity, investment,
1984 5 94 274 24 market beta, and return momentum. Bidding rms and
1985 73 152 265 20
equity issuers have greater idiosyncratic volatility, smal-
1986 98 189 570 29
1987 91 115 443 24 ler illiquidity, and larger market betas than their match-
1988 90 55 222 47 ing rms. All four types of event rms make larger capital
1989 101 103 194 46 investments as compared with control rms. Because a
1990 66 82 178 40 number of studies have shown mean security returns to
1991 90 240 367 32
1992 106 188 536 28
be related to these characteristics, divergences in returns
1993 142 261 692 30 across event and control rms in the months following
1994 219 171 508 36 the events could be attributable in whole or part to rm
1995 283 256 511 53 characteristics other than those used to create the
1996 351 332 795 22
matched sample.
1997 325 265 535 29
1998 409 198 344 15
1999 336 205 498 24 4. A model to assess long-run returns after corporate
2000 288 209 364 17
events
2001 205 163 93 18
2002 151 171 79 26
2003 168 196 67 119 The BHAR of event rm e over T months after a
2004 187 240 199 70 corporate event at date 0 is
2005 177 166 188 57
Total 3,972 5,131 8,966 887 Y
T Y
T
BHAReT 1 r et 1 r mt
t1 t1
( ) ( )
X
T X
T
greater median idiosyncratic volatility than their match- exp ln1 r et exp ln1 r mt ,
ing rms over the 120 months around the SEO. SEO rms t1 t1
are more liquid and have larger betas as compared with 1
their matching rms, particularly in the months after the
where ret and rmt are the month t stock returns of the
SEO. Also, SEO rms invest more than their matching
event rm and its matched control rm, respectively.
rms, consistent with the nding of Lyandres, Sun, and
Consider also the wealth relative (WR), as dened by
Zhang (2008). Further, SEO rms have greater return
Loughran and Ritter (1995):
momentum in approximately the 24 months around ( )
XT QT
the issue. 1 r et
WReT exp ln1 r et ln1 r mt QTt 1 :
Fig. 3 displays monthly medians on the same variables
t1 t 1 1 r mt
for the sample IPO rms and their size-matched control
2
rms over the 60 months after going public. The IPO rms
are characterized by substantially larger median idiosyn- The wealth relative measures the T-period gross return
cratic volatility, larger capital investment and market to a $1 investment in the event rm relative to
beta, and moderately better liquidity, as compared with the T-period gross return to the same investment in the
their control rms. matching rm. Testing whether BHAReT 0 is equivalent
Finally, Fig. 4 plots monthly medians on the same to testing whether WReT 1, and both are equivalent to
seven rm characteristics for dividend-initiating rms testing whether the time series mean log return is equal
and their matched comparable rms. The dividend- across the event and control rms.
initiating rms have greater median return momentum We propose to explain differences in cumulative stock
over the 48 months around dividend initiation, as well as returns between event and control rms based on differences
better median liquidity and greater capital investment in rm characteristics. We consider seven characteristics that
after dividend initiation, as compared with their have been shown to be associated with expected stock
matching rms. returns: market beta, rm size, BM, momentum, illiquidity,
Figs. 14 also provide evidence regarding the extent to idiosyncratic volatility, and investment. Market beta for July
which event and control rms are well matched on the of year t to June of year t1 is estimated using the market
basis of rm size and book-to-market through time. While model with monthly stock returns during years t 5 to t1.
each sample is well matched on average at a particular Firm size is measured as market capitalization at the end of
time, the closeness of the match degrades as time passes. the latest June. BM for July of year t to June of year t 1 is
The median size of bidding rms and dividend-initiating dened as the ratio of the book value of common equity at
Median beta Median size Median BM

0.9
0.55
600
0.8 500
0.5
Beta
Size
BM
400
0.7 0.45
300
0.6 200
0.4
0
4
8
2
6
0
4
8
2
0
4
8
2
6
0
4
8
2
0
4
8
-3 2
6
0
4
8
2
12
18
24
30
36
54
42
48
60
12
18
24
30
36
42
48
54
60
12
18
24
30
36
42
48
54
60
-6
-6
-6
0
6
0
6
0
6
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-2
-1
-1
Month Month Month
Bidder Match Bidder Match Bidder Match
Median momentum Median idiosyncratic volatility Median illiquidity

0.2 0.38 .06
Idiosyncratic volatility
0.15 0.36 .05
Momentum
Illiquidity
0.34 .04
0.1
0.32 .03
0.05 .02
0.3
0 .01
0.28
48
0
4
8
2
6
0
4
8
2
-6
54
60
0
4
8
2
6
0
4
8
2
0
4
8
2
6
0
4
8
2
0
6
12
18
24
30
36
42
-6
0
6
12
18
24
30
36
42
48
54
60
-6
0
6
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month Month Month
Bidder Match Bidder Match Bidder Match
Median investment
0.2
0.15
Investment
0.1
0.05
0
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month
Bidder Match
Fig. 1. Characteristics of bidding rms and their size- and book-to-market (BM)-matched comparable rms. This gure plots the time series of the
median beta, size, BM, momentum, idiosyncratic volatility, illiquidity, and investment for sample bidding rms and their size- and BM-matched
comparable rms, for the 60 months before and after the deal effective date. Month 0 corresponds to the month in which the deal is completed. At the
end of the latest December before the deal effective date, each bidder is matched with a rm whose size is between 70% and 130% of the bidder and has
the closest book-to-market ratio. The sample has 3,972 bidders over the period 19802005. Beta is the monthly market beta estimated using daily stock
returns in each month. Size in the gure is the market capitalization at the end of each month. BM for July of year t to June of year t 1 is dened as the
ratio of the book value of common equity at the end of scal year t 1 to the market value of common equity at the end of December of year t 1.
Momentum is the cumulative return over months 12 to 2. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in
the Fama and French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume. Investment for July of
year t to June of year t 1 is computed as the annual change in gross property, plant, and equipment in scal year t plus the annual change in inventory in
scal year t, divided by assets at the beginning of scal year t.
the end of scal year t 1 to the market value of common We implement the following regression model to
equity at the end of year t1. Momentum is the cumulative investigate the effects of rm characteristics on long-run
return over months 12 to 2. Idiosyncratic risk is the stock returns after a corporate event:
annualized standard deviation of the residuals obtained in a ln1 ret ln1 r mt a b1 DBetaet b2 DSizeet
Fama and French three factor regression implemented in
b3 DBM et b4 DMomet b5 DIlliquidityet b6 DIdioVolet
daily returns during month 2. Illiquidity for July of year t to
June of year t1 is computed as the average ratio of daily b7 DInvestment et eet
absolute stock return to dollar trading volume from July of
e 1,2,3,. . .,E; t 1,2,3,. . .,T, 3
year t1 to June of year t, relative to market average
illiquidity during the same period, as in Amihud (2002). where D denotes a normalized difference in the asso-
Following Lyandres, Sun, and Zhang (2008), investment for ciated rm characteristic across the event rm and the
July of year t to June of year t1 is computed as the annual matching rm.
change in gross property, plant, and equipment in scal year t We normalize the rm-characteristic variables to make
plus the annual change in inventory in scal year t, divided coefcients comparable across characteristics as follows.
by assets at the beginning of scal year t. Each of the For each characteristic, we compute the difference between
explanatory variables used in the month t regression is the event rm and its matching rm on a monthly basis.
known before month t. Then, for each characteristic, the positive differences are

1.1 350 0.7
1 300
0.6
0.9 250
Beta
Size
BM
0.5
0.8 200
0.7 0.4
150
0.6 100 0.3

0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month Month Month
SEO Match SEO Match SEO Match

0.6 0.1
0.38
0.4 Idiosyncratic volatility 0.36 0.08

Momentum
Illiquidity
0.34 0.06
0.2
0.32
0.04
0
0.3
0.02
-0.2 0.28
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
2
-6
0
6
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month Month Month
SEO Match SEO Match SEO Match
Median investment
0.12
0.1
Investment
0.08
0.06
0.04
0
6
-6
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
2
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month
SEO Match
Fig. 2. Characteristics of the seasoned equity offering rms and their size- and book-to-market (BM)-matched comparable rms. This gure plots the
time series of the median beta, size, BM, momentum, idiosyncratic volatility, illiquidity, and investment for sample SEO rms and their size- and BM-
matched comparable rms, for the 60 months before and after the equity offering. Month 0 corresponds to the month of equity offering. At the end of the
latest December before the offering, each SEO rm is matched with a rm whose size is between 70% and 130% of the SEO rm and has the closest book-
to-market ratio. The sample has 5,131 SEO rms over the period 19802005. Beta is the monthly market beta estimated using daily stock returns in each
month. Size in the gure is the market capitalization at the end of each month. BM for July of year t to June of year t 1 is dened as the ratio of the book
value of common equity at the end of scal year t 1 to the market value of common equity at the end of December of year t 1. Momentum is the
cumulative return over months 12 to 2. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama and
French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume. Investment for July of year t to June
of year t 1 is computed as the annual change in gross property, plant, and equipment in scal year t plus the annual change in inventory in scal year t,
divided by assets at the beginning of scal year t.
sorted from smallest to largest and converted to percentile and the equivalent wealth relative estimates the accumu-
rankings. Negative differences are separately sorted from lated return to event versus control rms, conditional on no
least to most negative and converted to minus the percentile difference in rm characteristics across event and control
ranking. The normalized differences, therefore, range from rms. Testing the hypothesis that the intercept is zero is
1 to 1. equivalent to testing whether the BHAR is zero and whether
The key to assessing abnormal returns in this specica- the wealth relative is one.
tion is the estimated intercept. As in any regression speci- This approach offers four improvements relative to the
cation, the intercept measures the mean of the dependent standard BHAR method. First, it accommodates variation
variable, conditional on outcomes of zero for each indepen- in rm characteristics other than those used to select the
dent variable. Further, the estimated intercept, a^ , can be matched rms. Second, it accommodates variation across
converted into an equivalent wealth relative according to time in rm characteristics. Third, by expressing the point
WR exp a^ T. When Eq. (2) is estimated without any estimate of abnormal returns in terms of the implied
explanatory variables, the estimated intercept measures wealth relative, it addresses the compounding problem of
the differential in the average continuously compounded BHARs noted by Fama (1998) and Mitchell and Stafford
return across event and control rms. When the explanatory (2000). Fourth, as Barber and Lyon (1997), Lyon, Barber,
variables are included in the regression, the intercept and Tsai (1999), and Mitchell and Stafford (2000) observe,
estimates the mean abnormal log return to event rms, long-run BHARs are skewed and have fat tails, rendering

0.65 110 0.7
0.6 0.6
100
0.55
Size
Beta
BM
90 0.5
0.5
80 0.4
0.45
0.4 70 0.3
0 6 12 18 24 30 36 42 48 54 60 0 6 12 18 24 30 36 42 48 54 60 0 6 12 18 24 30 36 42 48 54 60
Month Month Month
IPO Match IPO Match IPO Match

0.6 0.5
0.25
0.4
Illiquidity
0.2
Momentum
0.45
0.2 0.15
0.4
0 0.1
-0.2 0.35 0.05

0 6 12 18 24 30 36 42 48 54 60 0 6 12 18 24 30 36 42 48 54 60 0 6 12 18 24 30 36 42 48
54 60
Month Month Month
IPO Match IPO Match IPO Match
Median investment
0.2
Investment
0.15
0.1
0.05
0 6 12 18 24 30 36 42 48 54 60
Month
IPO Match
Fig. 3. Characteristics of the initial public offering rms and their size-matched comparable rms. This gure plots the time series of the median beta,
size, BM, momentum, idiosyncratic volatility, illiquidity, and investment for sample IPO rms and their size-matched comparable rms, for the 60
months after the public offering. Month 0 corresponds to the month of initial public offering. At the end of December after the IPO, each IPO rm is
matched with a rm with the closest but greater market capitalization. The sample has 8,966 IPOs over the period 19802005. Beta is the monthly
market beta estimated using daily stock returns in each month. Size in the gure is the market capitalization at the end of each month. Book-to-market
(BM) for July of year t to June of year t 1 is dened as the ratio of the book value of common equity at the end of scal year t 1 to the market value of
common equity at the end of December of year t 1. Momentum is the cumulative return over months 12 to 2. Idiosyncratic risk is the annualized
standard deviation of the residual daily stock returns in the Fama and French three factor regression. Illiquidity is the average daily ratio of absolute stock
return to dollar trading volume. Investment for July of year t to June of year t 1 is computed as the annual change in gross property, plant, and
equipment in scal year t plus the annual change in inventory in scal year t, divided by assets at the beginning of scal year t.
statistical inferences difcult.4 In contrast, the difference We primarily focus on results obtained when estimating
in monthly log returns, which is used as the dependent Eq. (3) in pooled time series and cross sectional data, giving
variable in our proposed specication, has better statis- equal weight to each event. However, we also assess results
tical properties. In Table 3, we report the standardized obtained when implementing the Fama and MacBeth (1973)
(scale invariant) skewness and kurtosis of BHARs for our procedure, in which a cross-sectional regression is estimated
samples. The skewness of the BHARs ranges from 0.93 for each sample month and nal estimates are obtained as
(SEOs) to 28.97 (M&As), and the kurtosis of the BHARs the time series mean of the monthly estimates.5 Our primary
ranges from 44.85 (SEOs) to 1451.12 (M&As). The skew- reliance on pooled estimation reects the Loughran and
ness and kurtosis of the differences in log returns are Ritter (2000) observation that events cluster by time period,
much smaller, with the skewness ranging from 0.23 to and that placing equal weight on each time period is
0.05 and the kurtosis ranging from 9.34 to 11.95. associated with reduced statistical power. However, we
5
Some sample months contain a small number of event rms. To
improve the accuracy of the Fama and MacBeth regression results, we
4
See Fama (1998), Brav (2000), Kothari and Warner (1997), and require at least 20 rms in each month for the Fama and MacBeth
Jegadeesh and Karceski (2004) for discussions of related statistical regressions. For consistency, we impose the same requirement in each
inference issues. month when implementing the calendar time portfolio method.

0.8 0.7
150
0.7
0.65
Beta
Size
0.6
BM
100
0.5 0.6
0.4
50 0.55
-6
0
6
-6
0
6
6
-6
0
0
4
8
2
6
0
4
8
2
12
18
24
30
36
42
48
54
60
0
4
8
2
6
0
4
8
36
2
12
18
24
30
42
48
54
60
0
4
8
2
6
0
4
8
2
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month Month Month
Dividend initiator Match Dividend initiator Match Dividend initiator Match

0.25 0.45 0.3
0.2 0.25
0.4
Momentum
0.15
Illiquidity
0.2
0.1 0.15
0.35
0.05
0.1
0
0.3 0.05
-6
0
6
0
6
0
-6
12
18
24
-6
6
8
12
18
24
30
36
42
48
12
18
24
2
6
0
4
8
2
54
60
0
4
8
2
6
0
4
8
2
30
36
42
48
54
60
0
4
0
4
8
2
6
0
4
8
2
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month Month Month
Dividend initiator Match Dividend initiator Match Dividend initiator Match
Median investment
0.09
0.08
Investment
0.07
0.06
0.05
0.04
-6
0
6
0
4
8
2
6
0
4
8
2
12
18
24
30
36
42
48
54
60
-6
-5
-4
-4
-3
-3
-2
-1
-1
Month
Dividend initiator Match
Fig. 4. Characteristics of the dividend-initiating rms and their size- and book-to-market (BM)-matched comparable rms. This gure plots the time
series of the median beta, size, BM, momentum, idiosyncratic volatility, illiquidity, and investment for sample rms that initiate cash dividends and their
size- and BM-matched comparable rms, for the 60 months before and after the deal effective date. Month 0 corresponds to the month in which the cash
dividend is announced. At the end of the latest December before the announcement date, each dividend-initiating rm is matched with a rm whose size
is between 70% and 130% of the dividend-initiating rm and has the closest book-to-market ratio. The sample has 887 dividend-initiating rms over the
period 19802005. Beta is the monthly market beta estimated using daily stock returns in each month. Size in the gure is the market capitalization at
the end of each month. BM for July of year t to June of year t 1 is dened as the ratio of the book value of common equity at the end of scal year t 1 to
the market value of common equity at the end of December of year t 1. Momentum is the cumulative return over months 12 to 2. Idiosyncratic risk
is the annualized standard deviation of the residual daily stock returns in the Fama and French three factor regression. Illiquidity is the average daily ratio
of absolute stock return to dollar trading volume. Investment for July of year t to June of year t 1 is computed as the annual change in gross property,
plant, and equipment in scal year t plus the annual change in inventory in scal year t, divided by assets at the beginning of scal year t.
report Fama and MacBeth estimates to assess robustness, and little effect on the computed t-statistic for the intercept,
because these results may be relevant to some investors.6 indicating relatively small correlation of residuals across time
The residuals in the pooled analyses are likely to be within deals. In contrast, clustering by date signicantly
correlated within rms or over time, potentially leading to decreases estimated absolute t-statistics, indicating signi-
biases in estimates of the coefcient standard errors, as cant correlations in residuals across rms on given dates. We
emphasized by Petersen (2009). In unreported regression therefore cluster residuals by date for all pooled regressions.
results, we nd that clustering standard errors by deal has
5. Empirical results
6
The pooled estimation procedure gives equal weight to each event,
Table 4 reports our key results, obtained by estimating
while the Fama and MacBeth method gives equal weight to each time
period. From the viewpoint of investors who seek to capture the long- Eq. (3). Panel A pertains to abnormal returns to SEO rms,
run abnormal returns after corporate events, the pooled estimation Panel B to IPO rms, Panel C to bidding rms in mergers,
results are relevant if the amount of capital committed to the trading and Panel D to dividend-initiating rms. For each event,
strategy varies proportionate to the number of events that occur. Fama we report results obtained when including the standar-
and MacBeth results are relevant if the amount of capital committed is
kept constant over time. The results of estimating additional specica-
dized difference in each characteristic individually in
tions by the Fama and MacBeth method are available in the Internet expression (3) and when including all the standardized
Appendix to this paper. characteristic differences simultaneously. Also, because
Table 3
Summary statistics for buy-and-hold abnormal returns (BHARs) and differences in monthly log return.
This table reports summary statistics of the 60-month BHARs and the difference in monthly log returns between the event rms and their matching
rms. The corporate events include mergers and acquisitions (M&As), seasoned equity offerings (SEOs), initial public offerings (IPOs), and dividend
initiations. Each bidding rm, SEO rm, and dividend-initiating rm is matched with a control rm based on size and book-to-market (BM) at the end of
the December prior to the event. Each IPO rm is matched with a control rm based on market capitalization at the end of the December after going
public. BHARs are the differences in the cumulative buy-and-hold returns over the 60-month period between the event rms and their matching rms.
Difference in monthly log return is the difference in monthly log returns between the event rms and their matching rms.
Variable M&As SEOs IPOs Dividend initiations
60-month Difference in 60-month Difference in 60-month Difference in 60-month Difference in

BHARs log return BHARs log return BHARs log return BHARs log return
Mean 0.079 0.005 0.073 0.003 0.354 0.012 0.286 0.004

Std. dev. 4.333 0.216 2.084 0.207 3.834 0.246 3.099 0.192
Skewness 28.972 0.231 0.933 0.138 12.707 0.232 3.331 0.05
Kurtosis 1451.123 11.949 44.848 11.577 692.636 9.337 47.546 11.015
Minimum 75.631 4.131 38.710 4.066 65.414 3.739 22.021 2.157
5th percentile 2.761 0.338 2.699 0.321 3.918 0.396 3.343 0.288
25th percentile 0.730 0.102 0.755 0.103 1.233 0.128 0.720 0.091
Median 0.058 0.002 0.015 0.001 0.316 0.007 0.210 0.002
75th percentile 0.549 0.097 0.616 0.100 0.481 0.111 0.987 0.099
95th percentile 2.300 0.317 2.320 0.309 2.998 0.359 3.755 0.298
Maximum 209.833 3.049 20.281 3.097 187.646 2.708 37.230 2.546
the relation between abnormal returns and differences in coefcients associated with momentum, idiosyncratic
characteristics between event and control rms is not volatility, investment, and beta verify the importance of
necessarily linear, we assess the effect of including the allowing for differences in these characteristics between
square of the difference in standardized attributes as well. event and control rms in assessing performance after
SEOs. The signicance of coefcients associated with rm
5.1. Firm characteristics and abnormal returns after SEOs size and BM, even in a sample created by matching on
these characteristics, underscores the desirability of
Panel A of Table 4 reports results of pooled estimation allowing for changes over time in matching variables.
(the rst ten columns) and Fama and MacBeth estimation The estimated intercept remains statistically signicant in
(the last column) of expression (3) for the SEO sample. each of Columns 3 to 6, indicating that the rm character-
The estimated intercept in Column 1, which is the mean istics included in these Columns do not individually fully
continuously compounded differential in returns for SEO explain the negative abnormal performance. In contrast, the
versus control rms, indicates negative abnormal returns intercept is both statistically and economically insignicant
to SEO rms, consistent with prior studies, including in Columns 7 and 8, in which idiosyncratic volatility and
Loughran and Ritter (1995), Spiess and Afeck-Graves investment are included as control variables, respectively.
(1995), Jegadeesh (2000), and Eckbo, Masulis, and Norli Differences in either idiosyncratic volatility or investment
(2007). The estimated intercept is 0.28%, corresponding alone explain about half of the apparent long-run abnormal
to a wealth relative of 0.85 and accumulated under- returns to SEO rms and render the remaining under-
performance of 15% for the SEO rms relative to their performance insignicantly different from zero.
matched counterparts. Column 9 reports results when all seven rm character-
Columns 2 to 8 report results obtained when the seven istics are included in the regression. Differences across event
rm characteristics are sequentially included in the and control rms in BM and momentum are positively
pooled estimation of expression (3). We observe that size, associated with abnormal returns, and idiosyncratic volatility,
BM, and momentum are individually positively and sig- investment, and beta are negatively associated with returns.
nicantly associated with abnormal return, and idiosyn- Most notably, the estimated intercept in this specication is
cratic volatility, investment, and beta are individually zero to four signicant digits (corresponding to a wealth
negatively and signicantly associated with abnormal relative of 1.0), with a statistically insignicant t-statistic of
return.7 The signicance of the individual slope 0.02.8 The evidence, therefore, indicates that variation in
rm characteristics across event and control rms fully
7
While we report coefcients on market beta that differ from zero
in some specications, the coefcients are always negative, and thus
inconsistent with standard asset pricing models. Fig. 2 shows that SEO
8
rms have signicantly greater median beta than their matching rms, The number of data points decreases from Column 1 to Column 9
especially around equity offerings. That is, SEO rms are more sensitive due to missing values in rm characteristics. Untabulated results show
to market returns. There are more SEOs during periods of market that the estimated intercept remains both economically and statistically
appreciation. To the extent that market returns are negative during signicant in the regression of Column 1 if the same data available to
the periods after heavy SEO offerings, lower returns are to be anticipated estimate Column 9 are used instead. In other words, limited data
for higher beta stocks. Similar reasoning potentially applies to IPOs and availability does not drive our results. The same conclusion holds for
M&As. the other corporate events studied.
Table 4
Explaining differences in stock returns between event rms and their matching rms.
This table presents the OLS and Fama and MacBeth (Fama-MacBeth) regression results for the difference in monthly log return between the event rm and its size- and book-to-market (BM)-matched
comparable rm, as well as the estimation results of the calendar time portfolio method. Each event rm is matched with a comparable rm based on size and BM. For mergers and acquisitions (M&As),
seasoned equity offerings (SEOs), and dividend initiations, each event rm is matched with a rm whose size is between 70% and 130% of the event rm and has the closest book-to-market ratio at the end of the
latest December before the event. At the end of December after initial public offering (IPO), each IPO rm is matched with a rm with the closest but greater market capitalization. Market beta for July of year t to
June of year t 1 is estimated with the monthly stock returns in years t 5 to t 1 using the market model. Size is the market capitalization at the end of the latest June. BM for July of year t to June of year t 1 is
dened as the ratio of the book value of common equity at the end of scal year t-1 to the market value of common equity at the end of December of year t 1. Momentum is the cumulative return over months
12 to 2. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama and French three factor regression in month 2. Illiquidity for July of year t to June of year t 1
is computed as the average daily ratio of absolute stock return to dollar trading volume from July of year t 1 to June of year t divided by the market average illiquidity over the same period, as dened by
Amihud (2002). Investment for July of year t to June of year t 1 is computed as the annual change in gross property, plant, and equipment in scal year t plus the annual change in inventory in scal year t,
divided by assets at the beginning of scal year t. For each of the seven rm characteristics (beta, size, BM, momentum, illiquidity, idiosyncratic volatility, and investment), we compute the difference between
the event rm and its size-and BM-matched comparable rm. In each month, the positive differences in each rm characteristic are ranked and normalized to be its percentile ranking. All negative differences
H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102

are ranked and normalized to be one minus its percentile ranking. Consequently, the normalized differences in each rm characteristics take a value from 1 to 1, with 0 corresponding to the difference in rm
characteristic that is the closest to 0. Panels AD report the pooled OLS and Fama and MacBeth regression results for our SEO, IPO, M&A, and dividend initiation samples, respectively. Wealth relative is calculated
as exponential of sixty times the estimated intercept. Panel E presents the estimation results using the calendar time portfolio method, in which the dependent variable is the average return of a portfolio of
rms that have conducted a certain type of corporate event during the past 60 months minus the risk free rate, and the independent variables are the Fama and French three factors augmented with the
momentum factor. All model specications employ robust standard errors. The associated t-statistics are reported in the parentheses below each coefcient. Superscripts nnn, nn, and n correspond to statistical
signicance at the one, ve, and ten percent levels, respectively.
OLS OLS OLS OLS OLS OLS OLS OLS OLS OLS Fama-MacBeth
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
Panel A: SEOs
Dependent variable: Difference in log return
DBeta 0.0090nnn 0.0040n 0.0041n 0.0024
( 3.160) ( 1.742) ( 1.830) ( 1.227)
DBeta2 0.0015 0.0026
(0.752) (1.018)
DSize 0.0031n 0.0003 0.0002 0.0018
(1.656) ( 0.167) ( 0.088) ( 1.132)
DSize2 0.0010 0.0003
(0.474) ( 0.126)
DBM 0.0043nnn 0.0044nnn 0.0045nnn 0.0028n
(2.650) (2.800) (2.843) (1.702)
DBM2 0.0008 0.0014
(0.415) ( 0.569)
DMomentum 0.0154nnn 0.0117nnn 0.0117nnn 0.0102nnn
(5.040) (3.962) (3.954) (4.300)
Dmomentum2 0.0002 0.0005
(0.115) (0.159)
DIlliquidity 0.0015 0.0016 0.0018 0.0006
(0.942) (1.003) (1.111) (0.314)
DIlliquidity2 0.0006 0.0007
(0.255) ( 0.209)
DIdio. volatility 0.0188nnn 0.0157nnn 0.0157nnn 0.0150nnn
( 6.320) ( 5.994) ( 6.040) ( 6.913)
DIdio. volatility2 0.0033 0.0083nn
(1.479) (2.146)
DInvestment 0.0055nnn 0.0044nnn 0.0043nnn 0.0045nnn
( 3.820) ( 3.208) ( 3.148) ( 2.950)
DInvestment2 0.0016 0.0010
( 0.813) ( 0.331)
93
94
Table 4 (continued )
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
Constant 0.0028nn 0.0016 0.0032nn 0.0026n 0.0029nn 0.0027nn 0.0014 0.0012 0.0000 0.0019 0.0018
( 2.012) ( 1.426) ( 2.375) ( 1.956) ( 2.079) ( 2.072) ( 1.101) ( 1.011) ( 0.017) ( 1.143) ( 0.870)
Cluster by date Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No
Observations 215,853 214,515 215,605 208,241 215,801 209,602 215,782 181,857 169,152 169,152 169,082
Adjusted R2 0.000 0.001 0.000 0.000 0.002 0.000 0.003 0.000 0.004 0.004 0.100
Wealth relative 0.845 0.908 0.825 0.856 0.840 0.850 0.919 0.931 1.000 0.892 0.898
Panel B: IPOs

DBeta 0.0089nn 0.0027 0.0026 0.0016
( 2.468) ( 0.871) ( 0.878) ( 0.689)
DBeta2 0.0030 0.0020
( 0.951) ( 0.715)
DSize 0.0007 0.0011 0.0011 0.0011
( 0.354) (0.474) (0.471) (0.578)
DSize2 0.0017 0.0028
(0.684) (0.977)
DBM 0.0150nnn 0.0072nnn 0.0070nnn 0.0058nnn
(5.859) (3.710) (3.653) (3.345)
DBM2 0.0042n 0.0042
( 1.790) ( 1.632)
DMomentum 0.0235nnn 0.0154nnn 0.0154nnn 0.0127nnn
(6.550) (4.027) (4.023) (5.043)
Dmomentum2 0.0011 0.0040
(0.437) (1.512)
DIlliquidity 0.0064nnn 0.0079nnn 0.0076nnn 0.0071nnn
(3.746) (3.398) (3.313) (3.197)
(0.738) (0.834)
( 6.270) ( 5.450) ( 5.442) ( 7.582)
DIdio. volatility2 0.0020 0.0044
( 0.774) ( 1.431)
DInvestment 0.0152nnn 0.0084nnn 0.0083nnn 0.0074nnn
( 6.535) ( 4.091) ( 4.088) ( 4.640)
DInvestment2 0.0038 0.0060nn
( 1.577) ( 2.124)
Constant 0.0115nnn 0.0079nnn 0.0114nnn 0.0109nnn 0.0105nnn 0.0113nnn 0.0089nnn 0.0099nnn 0.0034nn 0.0010 0.0015
( 5.008) ( 4.591) ( 5.172) ( 4.428) ( 4.608) ( 5.088) ( 4.703) ( 3.818) ( 2.185) ( 0.387) ( 0.547)
Observations 447,655 246,693 395,406 270,995 429,147 388,674 437,347 236,523 152,796 152,796 152,708
Adjusted R2 0.000 0.000 0.000 0.001 0.003 0.000 0.004 0.001 0.005 0.005 0.088
Wealth relative 0.502 0.623 0.505 0.520 0.533 0.508 0.586 0.552 0.815 0.942 0.914
Panel C: Mergers and acquisitions

DBeta 0.0064 0.0003 0.0001 0.0000
( 1.614) ( 0.083) ( 0.017) ( 0.011)
DBeta2 0.0055nn 0.0028
( 1.989) ( 1.123)
DSize 0.0031 0.0010 0.0006 0.0003
(1.509) (0.523) (0.329) (0.210)
DSize2 0.0008 0.0009
( 0.283) ( 0.333)
DBM 0.0031 0.0038n 0.0036n 0.0017
(1.566) (1.906) (1.813) (0.996)
DBM2 0.0020 0.0026
(0.749) (0.900)
DMomentum 0.0145nnn 0.0101nn 0.0102nn 0.0082nnn
(3.689) (2.582) (2.588) (3.176)
Dmomentum2 0.0013 0.0041
(0.560) (1.475)
DIlliquidity 0.0046nn 0.0059nnn 0.0055nnn 0.0028
(2.500) (3.064) (2.869) (1.370)

( 0.784) ( 0.857)
( 4.328) ( 4.535) ( 4.546) ( 6.404)
DIdio. volatility2 0.0051n 0.0079nn
( 1.791) ( 2.428)
DInvestment 0.0068nnn 0.0056nnn 0.0057nnn 0.0042nn
( 3.597) ( 3.079) ( 3.124) ( 2.558)
( 0.103) (0.579)
Constant 0.0046nnn 0.0044nnn 0.0050nnn 0.0045nnn 0.0045nnn 0.0041nnn 0.0039nnn 0.0049nnn 0.0035nnn 0.0002 0.0005
( 4.300) ( 4.708) ( 4.364) ( 4.145) ( 4.229) ( 4.175) ( 4.023) ( 3.947) ( 3.492) (0.105) ( 0.233)
Observations 160,900 159,860 160,739 155,132 160,860 160,856 160,845 125,458 120,133 120,133 119,682
Adjusted R2 0.000 0.000 0.000 0.000 0.001 0.000 0.002 0.000 0.003 0.004 0.112
Wealth relative 0.759 0.768 0.741 0.763 0.763 0.782 0.791 0.745 0.811 1.012 0.970
Panel D: Dividend initiations

DBeta 0.0054nn 0.0028 0.0025 0.0039
( 2.255) ( 1.166) ( 1.035) ( 1.220)
2
DBeta 0.0095nn 0.0118nn
(2.453) (2.173)
DSize 0.0041nn 0.0045nn 0.0054nn 0.0077nn
(2.128) (2.117) (2.548) (2.585)
DSize2 0.0061 0.0059
( 1.472) ( 1.034)
DBM 0.0025 0.0052nn 0.0052nn 0.0056n
(1.193) (2.081) (2.078) (1.840)
DBM2 0.0041 0.0015
( 0.975) ( 0.286)
DMomentum 0.0132nnn 0.0095nnn 0.0088nnn 0.0070nn
(5.079) (3.441) (3.161) (1.991)
Dmomentum2 0.0016 0.0035
(0.395) (0.627)
DIlliquidity 0.0039n 0.0055nn 0.0054nn 0.0072nn
(1.795) (2.027) (1.967) (2.072)
(1.104) (1.481)
95
( 6.185) ( 5.193) ( 4.915) ( 4.739)
96
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

(0.089) (0.359)
DInvestment 0.0042nn 0.0040n 0.0045nn 0.0050n
( 2.079) ( 1.875) ( 2.092) ( 1.754)
(0.682) ( 0.219)
Constant 0.0040nnn 0.0041nnn 0.0036nnn 0.0040nnn 0.0034nnn 0.0043nnn 0.0037nnn 0.0053nnn 0.0041nnn 0.0010 0.0008
(3.518) (3.549) (3.190) (3.610) (3.017) (3.769) (3.317) (4.387) (3.452) (0.276) ( 0.165)

Observations 44,956 44,854 44,853 43,233 44,935 43,867 44,934 33,574 31,742 31,742 31,211
Adjusted R2 0.000 0.000 0.000 0.000 0.002 0.000 0.002 0.000 0.004 0.004 0.221
Wealth relative 1.271 1.279 1.241 1.271 1.226 1.294 1.249 1.374 1.279 1.062 0.953
SEO IPO M&A Dividend initiation

(1) (2) (3) (4)
Panel E: The calendar time portfolio method

Dependent variable: Excess portfolio return
MKT 1.1853nnn 1.0784nnn 1.0507nnn 0.9525nnn
(44.562) (28.650) (42.153) (27.157)
SMB 0.8619nnn 1.0321nnn 0.6891nnn 0.6759nnn
(16.605) (14.574) (13.748) (9.528)
HML 0.0725 0.3100nnn 0.1189nn 0.4275nnn
( 1.433) ( 4.189) (2.291) (7.853)
UMD 0.2209nnn 0.3016nnn 0.2371nnn 0.0719n
( 6.188) ( 4.689) ( 6.066) ( 1.959)
Alpha 0.0009 0.0020 0.0009 0.0013
(0.927) (1.204) (0.848) (1.025)
Observations 369 365 308 355

Adjusted R2 0.941 0.878 0.941 0.832
explains abnormal returns to rms that completed SEOs increases to 0.34%, with a corresponding wealth relative
during the 1980 to 2005 sample period.9 of 0.82. The seven rm characteristics in combination
We allow for possible nonlinear effects by estimating serve to reduce the estimated long term under-
Eq. (3) while including both the level and the square of performance of IPO rms by about two-thirds.
each normalized difference in rm characteristics. The Column 10 of Table 4, Panel B, reports the pooled OLS
pooled OLS regression results are reported in Column regression results for our sample of IPO rms with both the
10 of Table 4, Panel A. Adding the squared terms barely level and the square of each of the seven characteristics
changes the estimated coefcient on each of the level included as controls, Column 11 reports the Fama and
terms. The square of idiosyncratic volatility is positively MacBeth estimation results of the same model specication.
associated with abnormal return in the Fama and Mac- Similar to results obtained for SEO rms, adding the squared
Beth regression (Column 11), and the squared terms of terms has little effect on the estimated coefcients on the
the other six characteristics are statistically insignicant. level terms. The square of BM is negatively associated with
Most important, the estimated intercept remains both abnormal return in the pooled OLS regression, and the square
economically and statistically insignicant, indicating of investment is negatively associated with abnormal return
that allowing for nonlinear relations does not alter the in the Fama and MacBeth regression. Most important, the
conclusion that variation in rm characteristics fully estimated intercept is both economically ( 0.10% and
explains the apparent abnormal returns to SEO rms. 0.15%, respectively) and statistically (t-statistics are
Finally, we report in Column 11 results that correspond to 0.39 and 0.55, respectively) insignicant. Therefore, the
those in Column 10, except that estimation is by the Fama evidence indicates that variation in rm characteristic is able
and MacBeth method, which places equal weight on each to fully explain the abnormal stock returns to IPO rms.
time period. Results are substantially identical across Column
10 which places equal weight on each event, and Column 11, 5.3. Firm characteristics and abnormal returns to bidding
which places equal weight on each time period. rms
We next report the results of estimating expression (3) for

5.2. Firm characteristics and abnormal returns after IPOs
the sample of bidding rms in mergers and acquisitions.
Column 1 of Table 4, Panel C, reports results obtained by
We now turn to results of estimating expression (3) for
pooled OLS estimation in the bidding rm sample, without
rms conducting IPOs between 1980 and 2005. Consistent
controls for rm characteristics. The estimated intercept of
with Loughran and Ritter (1995), the estimated intercept
0.46% (corresponding to a wealth relative of 0.76) indicates
from the pooled sample without controls for rm char-
that accumulated returns to bidding rms are on average 24%
acteristics (Column 1 of Table 4, Panel B) indicates poor
less than to control rms selected on the basis of size and BM
long-run returns to IPO rms. The point estimate of
ratio, consistent with Betton, Eckbo, and Thorburn (2008),
1.15% implies a wealth relative of 0.50, or cumulative
among others. The intercept is statistically signicant at the
IPO rm under-performance of 50%.
1% level, with an associated t-statistic of 4.30.
Columns 2 to 8 report results obtained when differences
We next assess the effect of allowing for differences in
between IPO and matched rms in the seven rm character-
each of the seven rm characteristics in turn, reporting
istics are included sequentially. Firm beta, BM, return mom-
results in Columns 2 to 8. Momentum and illiquidity are
entum, illiquidity, idiosyncratic volatility, and investment all
positively associated with abnormal returns, and idiosyn-
enter signicantly and are accompanied by decreases in the
cratic volatility and investment are negatively associated
absolute value of the estimated intercept. However, the
with abnormal returns. The estimated intercepts in
intercept remains signicantly negative in all seven cases.
Columns 2 to 8 range from 0.50% (corresponding to a
Column 9 reports results obtained when including all
wealth relative of 0.74) to 0.39% (corresponding to a
seven rm characteristics simultaneously. Momentum,
wealth relative of 0.79). Each of the estimated intercepts
BM, and illiquidity are positively and signicantly asso-
remains statistically signicant at the 1% level, indicating
ciated with abnormal returns to IPO rms, and idiosyn-
that the seven rm characteristics individually explain
cratic volatility and investment are negatively and
relatively little of the abnormal returns to bidding rms.
signicantly associated with abnormal returns. These
Column 9 reports results when all seven rm character-
results reinforce the importance of controlling for varia-
istics are included in the regression. We once again observe
tion in rm characteristics. The estimated intercept
that BM, momentum, and illiquidity are positively associated
with abnormal returns, and idiosyncratic volatility and
9
Billett, Flannery, and Garnkel (2011) examine returns after a investment are negatively associated with abnormal returns.
variety of corporate nancing activities, including public equity offer- The estimated intercept increases to 0.35% (corresponding
ings, private equity offerings, public debt offerings, and bank loans, and
to a wealth relative of 0.81) in Column 9 from 0.46%
they nd that negative abnormal returns are mainly driven by the subset
of rms that engage in multiple rounds of external nancing. They also (corresponding to a wealth relative of 0.76) in Column 1, but
note that controlling for only size and market to book could be remains statistically signicant at the 1% level. The inclusion
insufcient and investigate the effects of controlling for an array of of the set of seven rm characteristics in the linear pooled
other rm characteristics, though they do not consider illiquidity, regression, therefore, explains about a quarter of the bidder
idiosyncratic volatility, or investment as we do. Allowing for variation
in the rm characteristics they consider partially explains abnormal
abnormal returns.
returns to issuing rms, while the characteristics considered here do so Columns 10 and 11 of Table 4, Panel C, report results
completely. when allowing for nonlinear relations between rm
characteristic and abnormal return. Column 10 reports the 5.5. Implementing the calendar time portfolio method
pooled OLS regression results, and Column 11 reports results
obtained by the Fama and MacBeth procedure. As in the Results regarding long run performance after corpo-
cases of SEO and IPO rms, adding the squared terms barely rate events often conict across the BHAR and calendar
changes the estimated coefcient on each of the level terms. time portfolio methods. We next assess whether results of
The squared terms of beta and idiosyncratic volatility are our modied BHAR method differ from those obtained
negatively associated with abnormal return in the pooled OLS using the calendar time portfolio method, when each is
regression, and the square of idiosyncratic volatility is nega- implemented in our 1980 to 2005 sample.
tively associated with abnormal return in the Fama and For each month from February 1980 to December 2010,
MacBeth regression. we form an equal-weighted portfolio of rms that have
Most important, the estimated intercept is both econom- conducted the relevant corporate event during the preceding
ically (0.02% and 0.05%, respectively) and statistically (t- 60 months. The portfolio return, in excess of the risk free
statistics are 0.11 and 0.23, respectively) insignicant in return, is then regressed on the Fama and French (1993)
the nonlinear specications. That is, both the pooled OLS and factors and the Carhart (1997) momentum factor.
Fama and MacBeth specications provide results consistent Panel E of Table 4 presents the results. Strikingly, the
with the reasoning that there is no long run abnormal return estimated alpha is statistically insignicant across all fours
to bidder rms over the 1980 to 2005 period. This is events, with t-statistics ranging from 0.85 to 1.20. The studies
consistent with the conclusions of Moeller, Schlingemann, summarized in Table 1 show that the calendar time portfolio
and Stulz (2004), Harford (2005), Betton, Eckbo, and method and the BHAR method often produce contrasting
Thorburn (2008), and Rau and Vermaelen (1998). results, with the BHAR method indicating negative long run
abnormal returns after IPOs, SEOs, and merger bids and
5.4. Firm characteristics and abnormal returns to dividend- positive long-run abnormal returns after dividend initiations,
initiating rms while the calendar time portfolio method indicates an
absence of abnormal returns for any of the events.10 Our
Finally, Panel D of Table 4 presents the results of results show that empirical outcomes in the present sample
estimating expression (3) for the sample of dividend- no longer conict when the BHAR approach is modied to
initiating rms. The estimated intercept of 0.40% (corre- allow for imperfect control rm matching.
sponding to a wealth relative of 1.27) in Column 1 is both We caution, however, that the absence of any tension
economically and statistically signicant (t-statistic is 3.52), between the calendar time method and our modied
indicating positive abnormal returns in the 60 months after BHAR approach could be sample specic, as no inherent
dividend initiations, consistent with Michaely, Thaler, and reason exists to believe that allowing for sensitivity to
Womack (1995) and Boehme and Sorescu (2002). factor risk and allowing for variation in rm character-
When controlling for variation in individual characteris- istics must necessarily lead to the same conclusion
tics (Columns 2 to 8), we estimate signicant slope coef- regarding abnormal returns. The consistency of results
cients on the difference in market beta, rm size, return across the calendar time method and the modied BHAR
momentum, illiquidity, idiosyncratic volatility, and capital method must be assessed empirically in future work.
investment. However, the estimated intercept is reduced only
moderately or not at all, and it remains statistically signi- 5.6. Omitted characteristics versus time variation in
cant in each case, implying that the rm characteristics characteristics
considered have little individual explanatory power for the
positive returns after dividend initiations. The key results reported on Table 4 differ from prior
Including all seven characteristics simultaneously studies implementing the BHAR method both due to the
(Column 8) leads to signicant coefcient estimates on allowance for rm characteristics beyond size and market-to-
rm size, BM ratio, return momentum, illiquidity, idio- book and due to the allowance for changes through time in
syncratic volatility, and capital investment. Somewhat rm characteristics, including size and market-to-book. To
surprisingly, however, the intercept remains positive assess the relative importance of time variation in character-
and signicant, and it is little altered as compared with istics versus the inclusion of additional characteristics, we
the Column 1 intercept estimate, which was obtained estimate a version of Eq. (3) that relies on time-invariant rm
without inclusion of any characteristics. The signicant characteristics measured at the end of the month prior to the
linear relations between abnormal returns and six of the corporate event.11
characteristics apparently are mutually offsetting. Table 5 presents the resulting estimates of expression (3),
Columns 10 and 11 present results obtained when allow- obtained by OLS and by the Fama and MacBeth approach,
ing for non-linear effects of characteristics on returns, when
weighting each event (Column 10) and each period (Column 10
The calendar time portfolio method weights each time period
11) equally. As was the case for SEOs, IPOs, and bidding rms, equally and can underestimate abnormal returns if events cluster in
the intercept in each nonlinear specications does not differ calendar time, as Loughran and Ritter (2000) observe. Fama (1998)
from zero economically (point estimates are 0.0010 and suggests weighting the monthly portfolio return by the number of event
0.0008, respectively) or statistically (t-statistics are 0.27 rms therein. We implement this suggestion as a robustness check and
nd that the estimated alpha remains both statistically and economic-
and 0.17, respectively). We conclude that variation in rm ally insignicant for all four events.
characteristics can also fully explain long-run returns to 11
This analysis excludes IPO rms, because no pre-event data are
dividend initiating rms. available.
Table 5
Explaining differences in stock returns between event rms and their matching rms using rm characteristics before corporate event.
This table presents the OLS and Fama and MacBeth (Fama-MacBeth) regression results for the difference in monthly log return between the event rm
and its size- and book-to-market (BM)-matched comparable rm. The seven rm characteristics are all measured before the corporate event and take the
same value across the sixty months after the corporate event in the regressions. Market beta, size, BM, momentum, illiquidity, and investment are
measured at the end of the month before the merger and acquisition (M&A), seasoned equity offering (SEO), or dividend initiation. Idiosyncratic risk is
the annualized standard deviation of the residual daily stock returns in the Fama and French three factor regression in month 2 prior to the M&A, SEO,
or dividend initiation. Each event rm is matched with a comparable rm based on size and BM. Each M&A rm, SEO rm, and dividend-initiating rm is
matched with a rm whose size is between 70% and 130% of the event rm and has the closest book-to-market ratio at the end of the December prior to
the completion of the acquisition or equity offering. Market beta for July of year t to June of year t 1 is estimated with the monthly stock returns in years
t 5 to t 1 using the market model. Size is the market capitalization at the end of the latest June. BM for July of year t to June of year t 1 is dened as
the ratio of the book value of common equity at the end of scal year t-1 to the market value of common equity at the end of December of year t 1.
Momentum is the cumulative return over months 12 to 2. Illiquidity for July of year t to June of year t 1 is computed as the average daily ratio of
absolute stock return to dollar trading volume from July of year t 1 to June of year t divided by the market average illiquidity over the same period, as
dened by Amihud (2002). Investment for July of year t to June of year t 1 is computed as the annual change in gross property, plant, and equipment in
scal year t plus the annual change in inventory in scal year t, divided by assets at the beginning of scal year t. For each of the seven rm characteristics
(beta, size, BM, momentum, illiquidity, idiosyncratic volatility, and investment), we compute the difference between the event rm and its size- and BM-
matched comparable rm. In each month, the positive differences in each rm characteristic are ranked and normalized to be its percentile ranking. All
negative differences are ranked and normalized to be one minus its percentile ranking. Consequently, the normalized differences in each rm
characteristics take a value from 1 to 1, with 0 corresponding to the difference in rm characteristic that is the closest to 0. Wealth relative is calculated
as exponential of sixty times the estimated intercept. All model specications employ robust standard errors. The associated t-statistics are reported in
the parentheses below each coefcient. Superscripts nnn, nn, and n correspond to statistical signicance at the one, ve, and ten percent levels, respectively.
OLS OLS OLS Fama-MacBeth

(1) (2) (3) (4)
Panel A: SEOs
Dependent variable: Difference in log return
DBeta 0.0029 0.0028 0.0019
( 1.563) ( 1.557) ( 1.017)
DBeta2 0.0014 0.0032
( 0.608) ( 1.055)
DSize 0.0019n 0.0011 0.0012
(1.772) (1.058) (0.943)
DSize2 0.0040n 0.0051n
( 1.829) ( 1.755)
DBM 0.0027nnn 0.0028nnn 0.0021
(2.721) (2.751) (1.431)
DBM2 0.0073nnn 0.0062nn
(3.633) (2.255)
DMomentum 0.0028n 0.0033nn 0.0046nn
( 1.670) ( 2.035) ( 2.147)
Dmomentum2 0.0011 0.0027
(0.445) (0.919)
DIlliquidity 0.0003 0.0009 0.0003
(0.243) (0.691) (0.212)
2
DIlliquidity 0.0012 0.0030
(0.427) ( 0.857)
DIdio. volatility 0.0048nn 0.0046nn 0.0064nnn
( 2.254) ( 2.221) ( 2.844)
(0.602) (1.302)
DInvestment 0.0031nnn 0.0032nnn 0.0030nn
( 2.646) ( 2.698) ( 2.194)
(0.033) (0.708)
Constant 0.0028nn 0.0009 0.0028 0.0011
( 2.012) ( 0.918) ( 1.496) ( 0.440)
Cluster by date Yes Yes Yes No

Observations 215,853 139,375 139,375 139,305
Adjusted R2 0.000 0.000 0.001 0.081
Wealth relative 0.845 0.947 0.845 0.936
Panel B: Mergers and acquisitions

DBeta 0.0009 0.0007 0.0000
( 0.419) ( 0.328) (0.006)
DBeta2 0.0012 0.0009
( 0.459) ( 0.327)
DSize 0.0011 0.0010 0.0004
(1.034) (0.931) (0.366)
2
DSize 0.0012 0.0018
( 0.484) (0.636)
DBM 0.0021n 0.0021n 0.0007
OLS OLS OLS Fama-MacBeth

(1) (2) (3) (4)
(1.731) (1.750) ( 0.517)

DBM2 0.0001 0.0010
( 0.035) ( 0.378)
DMomentum 0.0058nnn 0.0055nnn 0.0032nn
( 3.219) ( 3.152) ( 2.096)
Dmomentum2 0.0030 0.0009
( 1.085) ( 0.340)
DIlliquidity 0.0038nn 0.0037n 0.0051nnn
(1.985) (1.945) (2.663)
( 0.969) ( 0.098)
DIdio. volatility 0.0088nnn 0.0088nnn 0.0084nnn
( 3.152) ( 3.163) ( 4.131)
( 0.565) ( 0.876)
DInvestment 0.0022 0.0024n 0.0024n
( 1.591) ( 1.683) ( 1.699)
( 1.020) ( 0.689)
Constant 0.0046nnn 0.0046nnn 0.0004 0.0016
( 4.300) ( 4.306) ( 0.204) ( 0.638)

Observations 160,900 110,744 110,744 110,315
Adjusted R2 0.000 0.001 0.001 0.090
Wealth relative 0.759 0.759 0.976 0.908
Panel C: Dividend initiations

DBeta 0.0010 0.0001 0.0008
( 0.438) (0.030) (0.251)
DBeta2 0.0030 0.0021
(0.804) (0.388)
DSize 0.0019 0.0022 0.0037
(1.010) (1.234) (1.221)
DSize2 0.0051 0.0073
( 1.211) ( 1.160)
DBM 0.0012 0.0003 0.0005
(0.571) (0.140) ( 0.179)
2
DBM 0.0002 0.0015
(0.041) ( 0.246)
DMomentum 0.0036 0.0043n 0.0058n
( 1.610) ( 1.864) ( 1.786)
Dmomentum2 0.0085nn 0.0081
(2.171) (1.567)
DIlliquidity 0.0069nnn 0.0071nnn 0.0079nn
(2.902) (2.970) (2.233)
DIlliquidity2 0.0113n 0.0106
(1.951) (1.372)
DIdio. volatility 0.0070nnn 0.0063nnn 0.0096nnn
( 3.019) ( 2.672) ( 2.649)
(0.145) (0.996)
DInvestment 0.0030 0.0026 0.0033
( 1.347) ( 1.148) ( 1.050)
DInvestment2 0.0043 0.0120nn
(1.045) (1.976)
Constant 0.0040nnn 0.0047nnn 0.0026 0.0037
(3.518) (3.570) ( 0.653) ( 0.612)

Observations 44,956 29,946 29,946 29,436
Adjusted R2 0.000 0.001 0.001 0.226
Wealth relative 1.271 1.326 0.856 0.801
with and without allowance for possible nonlinear effects, for investment, and momentum measured prior to the event
the SEO sample (Panel A), the M&A sample (Panel B) and the date are signicantly associated with long-run returns in all
dividend initiation sample (Panel C). For the SEO sample, model specications. This result supports the notion that the
Table 5, Panel A, shows that idiosyncratic volatility, omission of relevant factors is important in explaining long
run abnormal returns, even without allowing for time varia- allowing for variation across event and control rms in
tion in factors. The estimated intercept increases from characteristics measured before the event date lead to the
0.28% (corresponding to a wealth relative of 0.85) in same conclusion, i.e., that there are no abnormal long-run
Column 1 to 0.09% (corresponding to a wealth relative of returns to event rms, as allowing for variation in character-
0.95) in Column 2 when the seven rm characteristics are istics on a monthly basis. However, because Figs. 14 show
included in the OLS regression. The estimated intercept differential drift through time in average characteristics
becomes statistically insignicant in Column 2, and remains across event and control rms, allowing for such time
insignicant in Columns 3 and 4, when we allow for possible variation in general remains desirable.
nonlinear effects of rm characteristics on abnormal returns.
The results, therefore, indicate that the rm characteristics
prior to SEOs are able to substantially explain the abnormal 6. Conclusions
returns after SEOs.
For the M&A sample, results reported in Panel B of Table 5 Numerous studies nd signicant abnormal returns
indicate that idiosyncratic volatility, illiquidity, and momen- after corporate events, and authors tend to ascribe the
tum measured prior to the event date have signicant returns to the events themselves. However, as Loughran
explanatory power for long-run returns in all model speci- and Ritter (2000) observe, it is of interest to assess
cations, in the anticipated direction. The estimated intercept whether any particular pattern in returns is unique or is
is 0.46% (corresponding to a wealth relative of 0.76) and is a manifestation of other return regularities that are
statistically signicant in Columns 1 and 2. It increases to known to exist in the stock markets. We focus in parti-
0.04% and 0.16% (corresponding to a wealth relative of cular on the buy-and-hold abnormal return method, in
0.98 and 0.91, respectively) and becomes statistically insig- which accumulated returns to event rms are compared
nicant in Columns 3 and 4 when allowing for nonlinear with accumulated returns on control rms, typically
effects of rm characteristics on abnormal returns. Allowing matched on the basis of size and BM ratio.
for nonlinearities, the seven rm characteristics measured We show that typical matching algorithms for event
before M&As events are able to explain the abnormal returns and control rms are imperfect, in that matched rms
after M&As. differ signicantly in terms of illiquidity, idiosyncratic
Panel C of Table 5 shows that idiosyncratic volatility volatility, return momentum, market beta, and invest-
and illiquidity measured prior to dividend initiations are ment. Further, though typical matching procedures are
signicantly associated with abnormal returns after divi- successful in matching event and control rms on the
dend initiations in all model specications. However, the basis of size and BM ratio at a particular time, the quality
estimated intercept increases from 0.40% in the absence of these matches degrade over time. These mismatches in
of any controls (Column 1) to 0.47% (Column 2). Thus, rm characteristics are potentially relevant because the
linear relations between returns and characteristics mea- extant literature shows that returns are systematically
sured prior to the dividend initiations do not explain long- related to these rm characteristics. Observing signicant
run returns to dividend-initiating rms. In contrast, the BHARs for event rms, therefore, has at least two possible
estimated intercept becomes negative and statistically interpretations. The abnormal returns could be directly
insignicant in Columns 3 and 4, indicating that nonlinear associated with the event being studied or could reect, in
effects of variation in rm characteristics explains the full or part, differences across event and control rms in
positive abnormal returns after dividend initiations. characteristics that are themselves relevant for returns in
The coefcient on return momentum in each panel of the broader stock markets.
Table 5 is always negative and is statistically signicant in We introduce a simple regression-based method to
most model specications. The literature on momentum distinguish between these explanations and show that
prots (e.g., Jegadeesh and Titman, 1993) generally indicates the latter interpretation is appropriate. We nd that
positive return dependence over return horizons up to a year variation in rm characteristics completely explains
and negative longer term dependence. Not surprisingly, BHARs for M&A bidding rms, dividend-initiating rms,
momentum measured prior to the event is negatively asso- IPO rms, and SEO rms, whether results are weighted
ciated with returns over horizons as long as ve years after equally across rms and events (by OLS estimation of a
the event. The estimated coefcient on the BM ratio is pooled time series cross-sectional regression) or are
positive and statistically signicant in most model specica- weighted equally across time (by implementation of the
tions for the SEO and M&A samples. This implies that Fama and MacBeth method). Our results, therefore, sub-
imperfect event-date matches on the BM variable are rele- stantially reconcile the diverging results obtained in the
vant in explaining long-run abnormal returns. literature in studies that assess long run abnormal returns
In summary, the evidence indicates that idiosyncratic by measuring BHARs versus those that study alphas to
volatility, illiquidity, investment, BM, and momentum return
measured prior to the event dates do have explanatory (footnote continued)
power in the anticipated (based on market-wide studies) on two-digit standard industrial classication code) as the event rm.
for long run abnormal returns.12 In the present sample, Imposing an additional matching requirement degrades the quality of
the match. Nevertheless, we nd that the estimated intercept is insig-
nicantly different from zero in both the pooled OLS and Fama and
MacBeth regressions when allowing for nonlinear effects, for all four
12
In the Internet Appendix of this paper we report results obtained types of corporate events. We conclude that the key results reported
when matching rms are selected from within the same industry (based here are robust to the alternative of matching by industry.
calendar time portfolios formed from event rms. Our Carlson, M., Fisher, A., Giammarino, R., 2006. Corporate investment and
ndings indicate that the divergence in results is more asset price dynamics: implications for SEO event studies and long-
run performance. Journal of Finance 61, 10091034.
attributable to imperfect matching of event and control Cooper, M., Gulen, H., Schill, M., 2008. Asset growth and the cross-
rms than to the implicit weighting of events. section of stock returns. Journal of Finance 63, 16091651.
Further, the return patterns shown here are not only Eckbo, E., Masulis, R., Norli, O., 2000. Seasoned public offerings: resolu-
consistent across the four types of events studied, but, more tion of the new issues puzzle. Journal of Financial Economics 56,
251291.
important, are also consistent with return patterns that have Eckbo, E., Masulis, R., Norli, O., 2007. Security offerings. In: Eckbo, E.
been found for the US and international stock markets as a (Ed.), Handbook of Corporate Finance: Empirical Corporate Finance,
whole. The apparently abnormal long-run returns to rms Vol. I. , Elsevier/North-Holland, Amsterdam, pp. 233373. Chapter 6.
issuing equity through IPOs and SEOs, as well as to bidding Fama, E., 1998. Market efciency, long-term returns, and behavioral
nance. Journal of Financial Economics 49, 283306.
rms in mergers and dividend-initiating rms, reect the Fama, E., French, K., 1993. Common risk factors in the returns on stocks
characteristics of the rms (including prior returns) under- and bonds. Journal of Financial Economics 33, 356.
going the events and known market-wide return regularities Fama, E., MacBeth, J., 1973. Risk, return, and equilibrium: empirical tests.
Journal of Political Economy 81, 607636.
and need not be attributed to event-specic explanations.
Fu, F., Huang, S., Lin, H., 2012. The Persistence of Long-run Abnormal
We study rms undergoing four specic corporate Stock Returns: Evidence from Stock Repurchases and Offerings.
events: bidding rms engaged in mergers and acquisi- Unpublished working paper. Singapore Management University.
tions, rms that initiate cash dividends, and rms issuing Harford, J., 2005. What drives merger waves? Journal of Financial
Economics 77, 529560.
equity in initial or secondary public offerings. However, Jegadeesh, N., 2000. Long-run performance of seasoned equity offerings:
the issues that we address and the regression-based benchmark errors and biases in expectations. Financial Management
estimation procedure we implement are applicable to a 29, 530.
wide variety of corporate events in which it could be of Jegadeesh, N., Karceski, J., 2004. Long-run performance evaluation:
correlation and heteroskedasticity-consistent tests. Journal of
interest to measure abnormal stock returns after the Empirical Finance 16, 101111.
event, including exchange listing, management turnover, Jegadeesh, N., Titman, S., 1993. Returns to buying winners and selling
stock splits and dividend suspensions. losers: implications for stock market efciency. Journal of Finance
48, 6591.
Kothari, S., Warner, J., 1997. Measuring long-horizon security price
References performance. Journal of Financial Economics 43, 301339.
Kothari, S., Warner, J., 2007. Econometrics of event studies. In: Eckbo, E.
Amihud, Y., 2002. Illiquidity and stock returns: cross-section and time- (Ed.), Handbook of Corporate Finance: Empirical Corporate Finance,
series effects. Journal of Financial Markets 5, 3156. Vol. I. , Elsevier/North-Holland, Amsterdam, pp. 336. Chapter 1.
Amihud, Y., Mendelson, H., 1986. Asset pricing and the bid-ask spread. Li, E., Livdan, D., Zhang, L., 2009. Anomalies. Review of Financial Studies
Journal of Financial Economics 17, 223249. 22, 43014334.
Ang, A., Hodrick, R., Xing, Y., Zhang, X., 2006. The cross-section of Loughran, T., Ritter, J., 1995. The new issues puzzle. Journal of Finance
volatility and expected returns. Journal of Finance 61, 259299. 50, 2351.
Asparouhova, E., Bessembinder, H., Kalcheva, I., 2012. Noisy prices and Loughran, T., Ritter, J., 2000. Uniformly least powerful test of market
inference regarding returns. Journal of Finance. forthcoming. efciency. Journal of Financial Economics 55, 361389.
Barber, B., Lyon, J., 1997. Detecting long-run abnormal stock returns: Loughran, T., Vijh, A., 1997. Do long-term shareholders benet from
empirical power and specication of test statistics. Journal of corporate acquisitions? Journal of Finance 52, 17651790.
Financial Economics 43, 341372. Lyandres, E., Sun, L., Zhang, L., 2008. The new issues puzzle: testing the
Betton, S., Eckbo, E., Thorburn, K., 2008. Corporate takeovers. In: Eckbo, investment-based explanation. Review of Financial Studies 21,
E. (Ed.), Handbook of Corporate Finance: Empirical Corporate 28252855.
Finance, Vol. II. , Elsevier/North-Holland, Amsterdam, Lyon, J., Barber, B., Tsai, C., 1999. Improved methods for tests of long-run
pp. 291429. Chapter 15. abnormal stock returns. Journal of Finance 54, 165201.
Billett, M., Flannery, M., Garnkel, J., 2011. Frequent issuers inuence on Michaely, R., Thaler, R., Womack, K., 1995. Price reactions to dividend
long-run post-issuance returns. Journal of Financial Economics 99, initiations and omissions: overreaction or drift? Journal of Finance
349364. 50, 573608.
Boehme, R., Sorescu, S., 2002. The long-run performance following Mitchell, M., Stafford, E., 2000. Managerial decisions and long-term stock
dividend initiations and resumptions: underreaction or product of price performance. Journal of Business 73, 287329.
chance? Journal of Finance 57, 871900. Moeller, S., Schlingemann, F., Stulz, R., 2004. Firm size and the gains from
Brav, A., 2000. Inference in long-horizon event studies: a Bayesian
acquisitions. Journal of Financial Economics 73, 201228.
approach with application to initial public offerings. Journal of
Petersen, M., 2009. Estimating standard errors in nance panel data sets:
Finance 55, 19792016.
comparing approaches. Review of Financial Studies 22, 435480.
Brav, A., Geczy, C., Gompers, P., 2000. Is the abnormal return following
Rau, P., Vermaelen, T., 1998. Glamour, value and the post-acquisition
equity issuances anomalous? Journal of Financial Economics 56,
performance of acquiring rms. Journal of Financial Economics 49,
209249.
Brav, A., Gompers, P., 1997. Myth or reality? The long-run under- 223253.
performance of initial public offerings: evidence from venture and Ritter, J., 1991. The long-run performance of initial public offerings.
non-venture-backed companies. Journal of Finance 52, 17911821. Journal of Finance 46, 327.
Butler, A., Wan, H., 2010. Stock market liquidity and the long-run stock Spiess, D., Afeck-Graves, J., 1995. Underperformance in long-run stock
performance of debt issuers. Review of Financial Studies 23, returns following seasoned equity offerings. Journal of Financial
39663995. Economics 38, 243267.
Carhart, M., 1997. On persistence in mutual fund performance. Journal of Zhang, L., 2005. Anomalies. Working Paper 11322. National Bureau of
Finance 52, 5782. Economic Research, Cambridge, MA.

Bess em Binder Zhang

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Bess em Binder Zhang

Caricato da

Copyright:

Formati disponibili

Journal of Financial Economics 109 (2013) 83102

Contents lists available at SciVerse ScienceDirect

Journal of Financial Economics

Firm characteristics and long-run stock returns after

1. Introduction mean abnormal time series returns to portfolios of event

Author(s) Sample Sample Firm or deal Holding Equal-weighted Alpha - calendar

Panel D: Dividend initiations

Median beta Median size Median BM

Median momentum Median idiosyncratic volatility Median illiquidity

Median beta Median size Median BM

0.6 100 0.3

Median momentum Median idiosyncratic volatility Median illiquidity

0.4 Idiosyncratic volatility 0.36 0.08

Median beta Median size Median BM

Median momentum Median idiosyncratic volatility Median illiquidity

-0.2 0.35 0.05

Median beta Median size Median BM

Median momentum Median idiosyncratic volatility Median illiquidity

Variable M&As SEOs IPOs Dividend initiations

60-month Difference in 60-month Difference in 60-month Difference in 60-month Difference in

Mean 0.079 0.005 0.073 0.003 0.354 0.012 0.286 0.004

H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102

H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102

Panel C: Mergers and acquisitions

H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102

Panel D: Dividend initiations

DIdio. volatility2 0.0004 0.0020

H. Bessembinder, F. Zhang / Journal of Financial Economics 109 (2013) 83102

SEO IPO M&A Dividend initiation

Panel E: The calendar time portfolio method

Observations 369 365 308 355

We next report the results of estimating expression (3) for

OLS OLS OLS Fama-MacBeth

Cluster by date Yes Yes Yes No

Panel B: Mergers and acquisitions

OLS OLS OLS Fama-MacBeth

(1.731) (1.750) ( 0.517)

Cluster by date Yes Yes Yes No

Panel C: Dividend initiations

Cluster by date Yes Yes Yes No

Potrebbero piacerti anche