The authors discuss the application of the event study methodology when company disclosures affect their peers’ stock prices.
As the economic slowdown from COVID-19 unfolds, accompanied by lingering uncertainty over its severity and duration, individual company disclosures may help investors understand the impact of the COVID-19 crisis on company prospects and those of their industry peers. For decades, event studies have played a key role in the analysis of price impact, loss causation, and damages in securities litigation. As the first analytical step in the process of isolating the price effect of the event of interest—for example, the alleged fraud—an event study allows the financial economic expert to estimate the portion of company stock returns that is not attributable to market or industry effects.
In this article, authors Allan Kleidon and Filipe Lacerda discuss the application of the event study methodology when company disclosures affect their peers’ stock prices. The authors also discuss an example from securities litigation to show how accounting for bellwether effects may be critical to properly measuring the stock price effect of company-specific information in an event study analysis.
This article was originally published by Law360 in August 2020.
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