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Event Based Financial Research 2008
A REPORT
ON
EVENT BASED FINANCIAL RESEARCH Using

ARMA, Single Index and Risk Adjusted model
Submitted by,
Amit Kr. Jaiswal
07BS0427
Metrics4 Analytics
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A Report
On
EVENT BASED FINANCIAL RESEARCH Using

ARMA, Single Index and Risk Adjusted model
By
Amit Kr. Jaiswal
A Report Submitted in Partial Fulfillment of the Requirements of MBA

Program
Distribution List:
Mr. Anjaneyulu Marempudi (Founder & CEO, Metrics4 Analytics)
Mr. Rajeev Gupta (Director - Research & Analytics, Metrics4 Analytics)
Mr. Sanjay Banka (Director - Research, Metrics4 Analytics)
Dr. Jagrook Dawra (Professor, ICFAI Business School, Hyderabad)
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Acknowledgement
I express my sincere gratitude to CEO of Metrics4 Analytics, Mr. Anju Marempudi for his
encouragement, support and valuable guidance throughout the project duration. In spite of being
fraught with unending engagements in office, he kept me motivating to try best at all times.
I am also thankful to my Company Guide, Mr. Rajiv Gupta for not only providing me valuable
guidance and support for project but also providing me the required support with his extra
ordinary knowledge of IT.
The project area was entirely unknown to me. It required a lot of knowledge and guidance. I
would also like to express my gratitude to the Analysts Team at Metrics4 Analytics for
constantly elucidated upon my repetitive queries.
I would also like to thank my faculty guide, Prof. Jagrook Dawra for providing me with his
constant support and guidance in preparing this report.
I would also like to thank Renjith Sivaram, student of IBS Hyderabad, Batch of 2008, for
providing me support in application of ARMA, in spite of his busy work schedule.
Prof. Chakrapani deserves a special mention as he has consistently enlightened me with his
knowledge and experience of Event Analysis, which was a great help to me.
Lastly, I would like to thank ICFAI Business School and Metrics4 Analytics for providing me an
opportunity to gain hands-on experience by working in a corporate environment.
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Table of Contents
1. Abstract…………………………………………………………………………………8
2. Project Title……………………………………………………………………………...10
3. Objectives of the Project………………………………………………………………...10
4. Introduction……………………………………………………………………………..10
4.1 What is an Event?.......................................................................................................10
4.2 What is the importance of an Event?..........................................................................11
4.3 What is Event Analysis……………………………………………………………...12
4.4 Analysis of Major Events
4.4.1 Earnings Release…………………………………………………………….12
4.4.2 Dividend…………………………………………………………………….14
4.4.3 Guidance…………………………………………………………………….16
4.4.4 Legal/ Regulatory…………………………………………………………...17
4.4.5 Product Launch……………………………………………………………..18
4.4.6 FDA Filings…………………………………………………………………21
5. Review of Literature …………………………………………………………………….23
5.1 An Empirical Analysis of Reactions to Dividend Policy Changes for NASAQ
Firms……………………………………………………………….………………..24
5.2 An Empirical Study On Stock Price Responses To The Release Of The
Environmental Management Ranking In Japan……………………………………..25
5.3 Announcement Effect And Price Pressure: An Empirical Study Of Cross Border
Acquisitions By Indian Firms ………………………………………………………26
5.4 Are retailing mergers anticompetitive? An event study analysis................................27
5.5 Vindication Of The Event Driven Investment Strategy……………………………..28
5.6 Corporate Restructuring In Japan: An Event Study Analysis……………………….29
6. Price Prediction Using Box- Jenkins Methodology
6.1 Scope of The Analysis………………………………………………………………30
6.2 Data Collection……………………………………………………………………...31
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6.3 Sample………………………………………………………………………………31
6.4 Outline of The Analysis……………………………………………………………..31
6.5 Definition of Variables……………………………………………………………...31
6.6 Methodology………………………………………………………………………..33
6.7 Application of ARMA modeling Process…………………………………………..36
7. Comparative Analysis Using Single index and risk adjusted Model……………………43
7.1 Scope of The Analysis………………………………………………………………43
7.2 Data Collection……………………………………………………………………....43
7.3 Outline of The Analysis……………………………………………………………...44
7.4 Definition of Variables……………………………………………………………....45
7.5 Methodology…………………………………………………………………………45
7.6 When companies Make Dividend surprise…………………………………………..47
7.6.1 Key Findings and Conclusion…………………………………………………47
7.7 When companies Make Dividend surprise (0 to 10% increase)…………………….51
7.7.1 Key Findings and Conclusion………………………………………………….51
7.8 When companies Make Dividend surprise (10 to 20% increase)……………………56
7.8.1Key Findings and Conclusion………………………………………………….56
7.9 When companies Make Dividend surprise (20 to 50% increase)……………………62

7.9.1 Key Findings and Conclusion………………………………………………….62
8. Cross Sectional regression……………………………………………………………….67
8.1 Scope of The Analysis……………………………………………………………….67
8.2 Data Collection……………………………………………………………………....67
8.3 Outline of The Analysis……………………………………………………………...68
8.4 Definition of Variables……………………………………………………………....68
8.5 Methodology…………………………………………………………………………68
8.6 Result of regression………………………………………………………………….69
9. Limitation of Study…..…………………………………………………………………..73
10. Scope of Further Study…………………………………………………………………..74
11. References………………………………………………………………………………..75
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Table of Illustrations
1. Figure 1: Earnings Release of Lehman Brothers… …………………………………..…13

2. Figure 2: Dividend Declaration by Ambac……………………………………………....14
3. Figure 3: Guidance Issued by Countrywide Financial…………………………………..16
4. Figure 4: Class Action Lawsuit Faced by Bear Sterns………………………………......18
5. Figure 5: Waters AquaAnalysis System Launched by Waters Corporation………….....19
6. Figure 6: FDA Approval Received by Mentor Corp……………………………………21
7. Figure 7: In- Sample prediction of stock Price for the period of 1 month ……………………39
8. Figure 8: Abnormal return during event window (Single Index Model)………………...47
9. Figure 9: Abnormal return during event window (Risk Adjusted Model) ………..…….47
10. Figure 10: Cum. Abnormal return during event window (Single Index
Model)……………………………………………………………………………………48
11. Figure 10: Cum. Abnormal return during event window (Risk Adjusted Model)….……48
12. Figure 11: Abnormal return during event window ….…………………………………..35
13. Figure 12: Abnormal return during event window ………………………………..….....45
14. Figure 13: Abnormal return during event window …………………………..………….45
15. Figure 10: Cumulative Abnormal return during event window ……………………… 46
17. Figure 12: Abnormal return during event window…………………………………….53
18. Figure 13: Abnormal return during event window…………………………………….53
19. Figure 14: Cumulative Abnormal Return………………………………………………54
21. Figure 16: Abnormal return during event window (10 to 20%) ……………………… 58
22. Figure 17: Abnormal return during event window (10 to 20%)………………………..58
23. Figure 18: Cumulative Abnormal return during event window………………………..59
24. Figure 19: Cumulative Abnormal return during event window……………………….59
25. Table 1: Correlogram of Stock prices of IMCL………..………………………………………36
26. Table 2: Test of Unit Root at 1st difference……………………………………………...37
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27. Table 3: Correlogram of IMCL Stock price after application of ARMA Modeling
process...........................................................................................................................................38
28. Table 4 : Table values after application of Estimation Model ………………………..…........39
29. Table 5: Model Accuracy check for in-sample prediction………………………………………41
30. Table 6 : Calculation of Significance of Mean Abnormal Return (Single Index
Model)…………………………………………………………………………….….......50
31. Table 7 : Calculation of Significance of Mean Abnormal Return (Risk adjusted
Model)…………………………………………………………………………….….......51
32. Table 8: Calculation of Significance of Abnormal return (Single Index
Model)…………………………………………………..……………………......................55
33. Table 9: Calculation of Significance of Abnormal return (Risk adjusted
Model)……………………………………………………………………………………..56
34. Table 10 : Calculation of Significance of Mean Abnormal Return ……………….…......60
35. Table 11 : Calculation of Significance of Mean Abnormal Return ……………….….....61
36. Table 12 : Calculation of Significance of Mean Abnormal Return ……………….….....65
37. Table 12 : Calculation of Significance of Mean Abnormal Return………………………66
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ABSTRACT
The famous Miller and Modigliani theory argues that, in a perfect world, the value of the stock
price is unaffected by its dividend decision, so there should not be any change in the stock price
as well as trading volume by the dividend announcement or by the dividend payout policy of any
company but through the analysis it has been seen and proved that the dividend has created short
term price and trading volume volatility, even though the lasting of this price change may be of
very short term in nature. This trading and return volatility has been seen more in cases of
Dividend Surprise then Regular dividend declaration. This analysis has been undertaken using
Single – Index model, which discount the effect of market.
But several research paper have argued the use of risk adjusted rate of return instead of simple
return of stock and market because they argue that adjustment of risk only gives the figure which
an investor would really get from an investment and In the same line in this report I have tried to
make a comparative analysis to see the change in the pattern of return through the use of Single
Index as well as Risk Adjusted Model.
Whenever an investor find the cases of dividend surprise, his interest lands on the percentage of
change in dividend and to see this effect, for this purpose the cases of dividend surprise has been
clustered in (0 to 10%), (10 to 20%) and (20 to 50%) cases and a comparative study has been
made across these three clusters and the two models. Comparative analysis between the two
models gave the more or less same result in terms of abnormal return during the event window.
This study also examines the information content of dividend policy by concentrating on the
rationale for the payments by the firms. The use of Single Index Model and Risk Adjusted model
provides support that Dividend Declaration creates short term return volatility. Through the use
of the advance event study methodology the result has been made more comparable, and apt for
analysis.
For the purpose of developing an Event Driven Investment Metrics, inclusion of Box-Jenikens
Methodology has been made, this Metrics will not only give the investors an opportunity to
identify the pattern of return on the basis of Historical event data analysis through Single- Index
model and Risk adjusted model, but also a predicted price of the stock for that period and will
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help them accordingly to take his/ her position. Till the completion of this report I could develop
the model for In – sample prediction with 99% accuracy but out sample prediction still require
some more refinement of model and understanding of topic.
To identify the financial factors which affect the stock return a Cross sectional regression
analysis has been undertaken by taking Cumulative abnormal return of 1 day event window as
dependent variable and Percentage Increase in dividend, dividend payout ratio, dividend yield,
P/E ratio as dependent variable. Result suggest that even though these factors significantly affect
the return but there intensity of impact is very small and leads to conclusion that these factors
don‟t form part of the investment decision of event driven investor.
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PROJECT TITLE
Event Based Financial Research using ARMA, Single Index and Risk adjusted model
OBJECTIVES OF THE PROJECT
To establish and substantiate the impact of major events on stock prices.

To find out the time line of effect of major event types.
To Compare and substantiate the result through the application of different Models.
INTRODUCTION
WHAT IS AN EVENT?
An event is a corporate action initiated by a public company that affects the securities (equity or
debt) issued by the company. Any announcement made by the company, regarding its business
and operations may become an event. Also, anything said or reported for a company by any
person, magazine or journal may become an event depending upon the reliability and popularity
of the source from where it has been generated.
WHAT IS THE IMPORTANCE OF AN EVENT?

An event acts as a raw material for an investor on the basis of which he makes his final product,
i.e., his decision of what he has to do next with the stock of the related company. An event is
important information, or an opportunity which can be cashed on by the investor to earn more
than normal returns from a stock.
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WHAT IS EVENT ANALYSIS?

Event analysis is a technique to form an Event Driven Investment Strategy. An event driven
investment strategy is one which aims to capitalize on the irrationality of the investors. An event
contains certain information which may lead to rise in fall of the stock prices. So, it becomes
utmost important to analyze the event completely before an action is taken on it. This is where
event analysis comes into picture. An improper or incomplete analysis of an event may lead to an
unwise decision which may lend the investor into trouble. At the same time, a proper event
analysis can help an investor to earn higher returns than he does in the usual course of investing.
Another advantage which an event driven investment strategy has over other strategies like
technical analysis, diversification, etc., is its simplicity. Most of the techniques involve a huge
amount of probability and estimation whereas this strategy depends upon having a firm grasp on
financial instruments and their potential risks and profits. All that an investor needs to focus is
availability of right information at the right time in the right format.
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Analysis of Major Events
To elaborate more about events, let us consider the following examples of major events which
affect a company‟s stock prices. There are 72 event types identified by the company ranging
from as important as earnings release to as diversified as impairment charges. However, to build
a basic understanding of events the following examples would suffice.
EVENT 1
Tue Mar 18, 2008: Lehman Brothers Holdings Inc. reported results for 1Q ended Feb 29,
2008. Net revenues dipped 31% YoY to $3.5 billion. Net income was $489 million (EPS
$0.81), down from $1.15 billion (EPS $1.96) a year ago. Current quarter net revenues
reflect negative mark to market adjustments of $1.8 billion.
INVESTORS’ SENTIMENT
The present US financial Sector is characterized by heavy losses by world‟s biggest financial
institution and Investment Bankers. The case became worse with the fall of world‟s 5 th largest
investment banker Bear Sterns. All these instances shacked the confidence of US investors on
these financial giants and consequently there stock prices plummeted .The same case happened
with Lehman Brothers, the stock of company were shooting around its bottom because of heavy
loss expectation by the Investors, and the same confirmed by company in its Guidance.
Following this expectation company reported a decrease of 57 per cent in its net profit over the
corresponding quarter of the previous year; still the stock price went up by almost 60% beating
the S&P index. This shows that the investors were expecting Lehman‟s profit to go down by
more than 57% or may be the result turns out to be better compared to other companies in the
same league.
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EVENT DRIVEN INVESTMENT STRATEGY:

Figure 1: Earnings Release of Lehman Brothers
Source: http://www.eventvestor.com/evp_event.php?eid=152504
Before Lehman Brothers reported its earnings, the market was very negative on stock‟s
performance and resultantly stock was touching to its new low. But the less than expected
downfall of profit report by the company changed the sentiment and stock became the biggest
gainer of the day. An event driven investor could cash this situation and could generate a
whooping return of 80 per cent if he would have picked the stock on 17th Mar, 2008 and sold on
the high of 18th Mar, 2008. Even the market was full with such type of news and several analysts
also showed the expectation of better than expected performance. The key lies here in taking the
prompt investment decision and exit out of the stock on the right time. Because if the same
investor remain invested for full event window then there would not be any change in his
position, similarly if he invest one day before and remain invested for one day after the event,
then his profit will decrease to the level of 10%.
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EVENT 2:
Wed Jan 16, 2008: Ambac will reduce its quarterly common stock dividend from $0.21 per
share to $0.07 per share.
INVESTORS’ SENTIMENT:
Unlike in India, in the US, the companies declare quarterly dividend. The dividend in itself does
not create any significant volatility either in stock return or in its trading volume (the same has
been proved in event research undertaken). But any dividend surprise attracts the attention of
investors and consequently generates the volatility in stock price as well as trading volume.
These dividend actions signal the investor about the company‟s future prospect. Here Ambac
Corp. was in loss from the past two quarters because of the heavy impairment charges and to
strength its financial position the Board of Directors decided to reduce the dividend amount but
this signaled to the market wrongly and stock crushed towards its bottom.
EVENT DRIVEN INVESTMENT STRATEGY

Figure 2: Dividend Declaration by Ambac
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Past quarter losses and falling EPS had already cued to investors about the bad financial of the
company and resultantly stock was neutral in terms of returns in the market. But on the news of
reduction in dividend rate investors disbelief in the stock strengthen and stock fall to more low
level, and fall more on the second day of the declaration because of the spread of announcement
effect but within the days, the full information spread into the market, that company could not
deliver the result because some of the onetime charges and revenues of the company is rising
constantly, resultantly the stock shored up and outperformed the market by 52 per cent. An event
driven investor could use this situation and generate the hefty return of 120 per cent by taking the
position opposite to the market because on the day of declaration the market was very negative
and purchase on that day and selling three days after when market could get the full information,
will have substantiated his portfolio performance.
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EVENT 3
Fri Oct 26, 2007: Countrywide Financial provided guidance for 4Q 07 & FY 08. 4Q 07
EPS: $0.25 to $0.75. FY 08 Return on Equity: 10% to 15%.
Guidance is the forecast which a company makes about its next quarter or current fiscal or next
fiscal earnings. Guidance exhibits a company‟s confidence about its financial condition and in
this case in spite of the turbulent US financial sector, the company showed the positive
improvement in its earnings for the quarter as well as Full FY 08, it not only helped the company
to gain momentum by outperforming the NYSE financial Sector index by 38 per cent but also
surpassing the S&P 500 index by 30 per cent.
Figure 3: Guidance Issued by Countrywide Financial
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EVENT 4
Mon Mar 17, 2008: Coughlin Stoia Geller Rudman & Robbins announced a class action
suit on behalf of purchasers of The Bear Stearns Companies Inc. stocks during the period
between Dec 14, 2006 and Mar 14, 2008. The complaint alleges that during the Class
Period, defendants made false and misleading statements regarding the business and
financials.
The Bear Stearns Companies Inc., the name in itself suggests the end of the era of the US
financial market. This event shows the legal issues faced by the company. In corporate world,
many companies sue or get sued by other companies for one or other reason. These lawsuits
significantly affect the companies‟ bottom-line as they involve huge expenditures and charges.
Here the end of the Bear Sterns came all of the sudden and therefore attracted a lot of legal
action in the form of investor‟s grievances against the company. The market was already
fumbled by the sudden fall of the company and investor‟s loss of value as well as money
aggrieved the situation.

Figure 4: Class Action Lawsuit Faced by Bear Sterns
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On 17th Mar the news of proposed Acquisition of Bear Sterns by JP Morgan for $4 per share
touches the Wall Street building and took the prices of Bear Sterns Share to new bottom.
Therefore this fall in prices could not attributed purely to this event, rather was a mixed reaction
of few events together. The price shoots up on 24 th Mar by making the abnormal return of 80 per
cent because of the indication by the J P Morgan to raise the offer price. In this turbulent market
the right strategy would be to see the right price and exit from the company.
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EVENT 5
Tue Oct 23, 2007, Waters Corporation unveiled its new Waters AquaAnalysis System, a
total system solution designed to detect pesticides and other contaminants in drinking
water and meet or exceed regulatory requirements worldwide.
INVESTORS SENTIMENT:
When a company launches a new product, its earnings are expected to increase. It depends on the
novelty of the product, its utility for the customers, its direct and indirect competitors, and the
market share it is expected to command. In the case of Waters Corporation, Waters Aqua
Analysis System was much awaited product of the company. Company has been doing good in
terms of manufacturing quality products and delivery value to the customer and addition of new
high quality product in its product line, created a positive sentiment in the market and lifted the
stock price.

Figure 5: Waters AquaAnalysis System Launched by Waters Corporation
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The launch of the product by the company acted positively for the company and lifted the stock
price on the day of launch, event this case is in line of the famous ipod case as mentioned
previously. Since the company was in process from the past few months for getting the
regulatory approval and launching the product. Since the news came to the market early, it
reduces the gain opportunity by this launch. Even though an investor acting on the sole market
news could make a return of 6 per cent above the market return, if he/she invests 1 day before
and remain invested day after the event.
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EVENT 6
Mar 21, 2008: Mentor Corporation received FDA approval for Prevelle Silk. It is the first
of a new line of lidocaine containing hyaluronic acid dermal fillers that Mentor anticipates
to market and distribute globally.
INVESTOR’S SENTIMENT:
As we know that the event like FDA is more important for the companies in the healthcare
sector. But the return on these stocks depends on level of filing for approval. Here the drug adds
very important feature of the company existing portfolio, but perhaps the initial (Phase 1) level
of filing could not attract much of the interest of the investor.
Figure 6: FDA Approval Received by Mentor Corp
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EVENT DRIVEN INVESTMENT STRATEGY:
A Phase 1 filling by the company generally does not attract much of the investor‟s sentiment, so
long as it is a Blockbuster Drug and it is much awaited by the market. In the other cases the
investor could get in to stock before the declaration of the FDA filing by the company. Like in
this case an investor can enter 2 day before the declaration and can make a marginal return of
12% by beating the market.
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Review of Literature
AN EMPIRICAL ANALYSIS OF REACTIONS TO DIVIDEND POLICY CHANGES FOR NASDAQ

FIRMS
Author: Patricia A. Ryan (Colarado State University), Scott Besley (University of South
Florida) and Hei Wai Lee (University of Michigan-Dearborn)
Published in: Journal of Financial and Strategic Decisions Volume 13 Number 1
Year: 2000
Objective of Study: To examine the information content of dividend policy
Insight of the Paper:
This paper circles around two arguments, the signaling argument and the free cash flow (FCF)
argument. The signaling arguments present the basis for asymmetric information between
managers and shareholders. Given this environment, management has the incentive to signal
positive firm-specific private information to shareholders. Negative information would be
withheld until financial constraints force the release of such information. FCF argument says that
managers tend to hoard cash to invest in negative NPV projects for their own utility
maximization. The agency costs that result from this overinvestment decrease the value of the
firm.
The purpose of this research is to test the dividend signaling and free cash flow hypothesis to
determine if either hypothesis better explains stock price reactions to changes in dividend policy
for NASDAQ firms.
This paper uses an event study methodology that disentangles the mean effect from the variance
effect when measuring a change in stock prices. The authors used dividend initiations and
omissions, as opposed to changes in dividend payments, in the research. This is done because
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dividend initiations and omissions reduce the bias in estimating the dividend surprise because the
announcements are less likely to be anticipated. This allows for a stronger test of the signaling
hypothesis.
The analysis of data is done using regression analysis. Average standardized abnormal return,
and its variance is calculated. Finally, a t-test is applied to calculate the unconditional wealth
effect.
Usefulness for the Project
This research paper uses an improved event study methodology, which controls for fluctuations
in idiosyncratic risk around the announcement, to document significant wealth and variance
effects upon the initiation or omission of dividends by NASDAQ firms. This paper provides a
base for event study analysis. This paper gives a range of statistical applications which can be
used in the project.
AN EMPIRICAL STUDY ON STOCK PRICE R ESPONSES TO THE RELEASE OF THE

ENVIRONMENTAL MANAGEMENT RANKING IN JAPAN
Authors: Fumiko Takeda (University of Tokyo) and Takanori Tomozawa (University of Tokyo)
Published in: Economics Bulletin, Vol. 13
Year: 2006
Objective of the Study: To analyze the impact of the release of the Nikkei Environment
Management Ranking on stock prices
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Summary
This paper takes the release of the Nikkei Environment Management Ranking as an event and
attempts to find out its impact on the stock prices of the firm. In this paper, the authors have
taken a sample of top 30 companies in this release. They have used an event study methodology
in their research. They have chosen a three-day event window and 150 day estimation window.
Then, abnormal return, cumulative abnormal return, and its variance have been calculated. Then,
the normality of CAR is checked using J-statistic.
The authors have concluded that the stock prices on the whole did not respond significantly to
the release of the ranking within a three-day event window. Moreover, stock prices of companies
that experienced a downgrade increased significantly, while those that experienced an upgrade
decreased significantly.
The authors have used event based methodology to establish a relationship between stock prices
and Nikkei Environment Management Ranking. The quantitative tools used in the research like
Cumulative Abnormal Return, J-statistic, etc. can be used in the project for better analysis and
results.
ANNOUNCEMENT EFFECT AND PRICE PRESSURE: AN EMPIRICAL STUDY OF

CROSS BORDER ACQUISITIONS BY INDIAN FIRMS
Authors: PengCheng Zhu (Carleton University) and Shavin Malhotra (Carleton University)
Published in: International Research Journal of Finance and Economics, Issue 13
Year: 2008
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Objective of Study: To examine the stock performance of a sample of Indian firms acquiring
US firms in the period 1999-2005
Summary
Cross Border M&As have increased substantially over the last few years. The transaction value
has increased by 88% over 2004 to US $716 billion and the number of deals has increased 20%
to 6134. Although the firms from the developed world command lion‟s share of cross border
acquisition, acquisitions from developing economies like India and China have entered the fray
in a big way. A little research work has been carried on cross border acquisitions by developing
countries, and this research paper attempts to fill this gap. The author has adopted standard event
analysis methodology and used Mean Adjusted Return Model to calculate Abnormal Return and
Cumulative Abnormal Return, to observe the market reaction to the M&A announcement event.
To avoid the possibility of effect of other factor on abnormal return, the author has used
multivariate regression with key determinant variables. The author concluded by saying that the
acquisitions of the US firms by Indian Companies have positive impact on the acquiring firm‟s
value in the initial days after the announcement date, but the trend become negative in the next
few days in the announcement period.
This paper provides with the tools which can be used to undertake event based analysis. The
methods of use of applications like abnormal return, cumulative abnormal return, multivariate
regression analysis, etc. can be included in the project using this research paper as base.
ARE RETAILING MERGERS ANTICOMPETITIVE? AN EVENT STUDY ANALYSIS
Authors: John David Simpson (Federal Trade Commission) and Daniel Hosken (Federal Trade
Commission)
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Published in: NA
Year: 1998
Objective of Study: To determine whether four retailing mergers that occurred during the late
1980s reduced competition
Summary: In this study, in order to examine the mergers that would have been most likely to
reduce competition, the authors drew a sample from the set of transactions that occurred between
1984 and 1993. The four mergers analyzed in this study are: May Department Stores Company‟s
1986 acquisition of Associated Dry Goods, Great Atlantic & Pacific Tea Company‟s 1986
acquisition of Waldbaum Inc., Von Companies‟ 1987-1988 acquisition of Safeway‟s Southern
California stores, and American Stores‟ 1988 acquisition of Lucky Stores Inc. The authors have
used the market model to identify those dates on which the target firm experienced large and
statistically significant abnormal returns. The authors have related these mergers to the
Herfindahl-Hirschman Index (HHI) computed for the area or areas affected by the merger. The
authors have also used market model to analyze the impact of these M&As. Using this
methodology, the authors found that rival firms experienced positive abnormal returns from May
Company‟s 1986 acquisition of Associated Dry Goods and American Stores‟ 1988 acquisition of
Lucky Stores. These results offered some evidence that retailing mergers that lead to large
increases in concentration in already concentrated markets may lessen competition and lead to
higher product market prices.
Usefulness for the Project: The authors in this study have also used the same market model as
used in An Empirical Analysis of Reactions to Dividend Policy Changes for NASDAQ Firms,
mentioned above. This research paper gives an insight of event study from the M&A perspective.
VINDICATION OF THE EVENT DRIVEN INVESTMENT STRATEGY
Author: Adam T. Samson
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Published in: NA
Year: NA
Objective of Study: To explain the usefulness of an Event Driven Investment Strategy
Summary
The Event Driven Investment Strategy is one that aims to capitalize on the irrationality of
investors. This research paper includes study of earnings release Osiris Therapeutics (OSIR),
launch of Ipod by Apple Computer (AAPL), rumors regarding Arch Coal (ACI), earnings release
of Steel Dynamics (STLD), earnings release of Oakley (OO), and earnings release of Molex
(MOLX). All these companies belong to different sectors. The purpose of taking the companies
from different sectors is to generalize the impact of events on all the companies regardless of
their sectors.
The impact of these events on the stock prices of these companies is shown graphically. The
stock prices have moved up and down depending upon the investors‟ expectations from the
companies and their performance.
This research paper forms the base for conducting an event based research. The study done in
this paper shows the impact of the events on the stock prices. There are no statistical techniques
used in this paper. The impact has been shown by graphical representation of stock price
movements only. The conclusions of this study can be proved by using other techniques as used
by other authors.
CORPORATE RESTRUCTURING IN JAPAN: AN EVENT STUDY ANALYSIS
Author: Jorge A. Chan-Lau
Published in: IMF Working Paper
28
Year: 2001
Objective of Study: To evaluate the stock price impact of restructuring announcements before
and after the Commercial Rehabilitation Law (CRL) using event analysis
Summary
After World War II, Japan‟s corporate governance system was based on cross shareholdings and
long term relationships among a group of firms, also known as keiretsu. The leading role in this
keiretsu was played by the main bank in the group. In the long period of economic stagnation for
the last ten years, the government realized the importance of restoring profitability in the
corporate sector. This led to the formation of CRL. This research paper attempts to find the stock
price impact of the restructuring announcements by taking a sample of 1011 restructuring
announcements before and after the formation of CRL. The results of the study show a more
positive price impact during the post CRL period, compared to pre CRL period. Also, the
negative impact of labor force reduction announcements on the announcing firm‟s stock price
during the pre CRL period disappeared in the pre CRL period.
This research paper successfully attempted to analyze the impact of restructuring announcements
on stock prices. The event considered for research is also unique. The author of this report has
also used the same statistical technique of calculating abnormal return as in other research papers
written by other authors.
29
Price Prediction Using the Box- Jenkins (BJ)

Methodology
There are different statistical tools and techniques used for price prediction on the basis of
historical price data and application of ARMA Modeling Process is one of them. In this
application I have tried to make the data series stationary, so that present data become good
predictor of future data.
Given a time series of data Xt, the ARMA model is a tool for understanding and, perhaps,
predicting future values in this series. The model consists of two parts, an autoregressive
(AR) part and a moving average (MA) part. The model is usually then referred to as the
ARMA (p,q) model where p is the order of the autoregressive part and q is the order of the
moving average part
SCOPE OF ANALYSIS
Investor uses different investment strategy, and different price matrix for identifying the right
price and appropriate timing for a particular stock purchase. Through the inclusion of ARMA
modeling I have tried to make a comparative analytical metrics, which provides investor an
opportunity to make a comparative analysis of events (through Market and Risk Adjusted
Model) as well as appropriate price (through ARMA).
Considering the broad nature of this ARMA modeling and my present understanding of the topic
the price prediction has been limited to In-Sample Prediction. This In sample prediction gives an
opportunity to understand the accuracy and aptness of present model, which can be used for Out-
Sample Price Prediction.
30
OUTLINE OF ANALYSIS
The main aim of this analysis is to predict the price of stock during the event window, so that an
investor can use this prediction, but considering the vast nature of the analysis and understanding
of the topic analysis has been limited to In- sample prediction
DEFINITION OF VARIABLES
An Autoregressive (AR) Process:
Let Yt represent stock price at time t. If we model Yt as

(Yt − δ) = α1(Yt−1 − δ) + ut
where δ is the mean of Y and where ut is an uncorrelated random error term with zero mean and
constant variance σ2 (i.e., it is white noise), then we say that Yt follows a first-order
autoregressive, or AR(1), stochastic process. Here the value of Y at time t depends on its value
in the previous time period and a random term; the Y values are expressed as deviations from
their mean value. In other words, this model says that the forecast value of Y at time t is simply
some proportion (= α1) of its value at time (t − 1) plus a random shock or disturbance at time t;
again the Y values are expressed around their mean values.
A Moving Average (MA) Process:
If we model (Stock Prices) Y as follows:

Yt = μ + β0ut + β1ut−1
where μ is a constant and u, as before, is the white noise stochastic error term. Here Y at time t is
equal to a constant plus a moving average of the current and past error terms. Thus, in the present
case, we say that Y follows a first-order moving average, or an MA(1), process
But if Y follows the expression
Yt = μ + β0ut + β1ut−1 + β2ut−2
then it is an MA(2) process.
31
An Autoregressive and Moving Average (ARMA) Process
There is high probability that Y (Stock Price) follows both AR and MA process and is therefore
ARMA. Thus, if Yt follows an ARMA (1, 1) process, it can be written as
Yt = θ + α1Yt−1 + β0ut + β1ut−1
because there is one autoregressive and one moving average term. Here θ represents a constant
term. In general, in an ARMA (p, q) process, there will be p autoregressive and q moving
average terms.
Unit Root Test:

A unit root test tests whether a time series variable is non-stationary, using an autoregressive
model. To test the unit root we can use the Augmented Dickey-Fuller test or the Phillips-
Perron test. Both the tests use the existence of a unit root as the null hypothesis.
Dickey Fuller Test:
The Dickey-Fuller test tests whether a unit root is present in an autoregressive model. The main
objective of Dickey- Fuller test is, If the series y is (trend-) stationary, then it has a tendency to
return to a constant (or deterministically trending) mean. Therefore large values will tend to be
followed by smaller values (negative changes), and small values by larger values (positive
changes). Accordingly, the level of the series will be a significant predictor of next period's
change, and will have a negative coefficient. If, on the other hand, the series is integrated, then
positive changes and negative changes will occur with probabilities that do not depend on the
current level of the series; in a random walk, where you are now does not affect which way you
will go next.
There is also called the Augmented Dickey Fuller (ADF), which removes all the structural effect
(autocorrelation) in the time series and then tests using the same procedure.
32
Akaike's information criterion:
Akaike's information criterion (AIC) is a measure of the goodness of fit of an estimated

statistical model. It is grounded in the concept of entropy, in effect offering a relative measure of
the information lost when a given model is used to describe reality and can be said to describe
the tradeoff between bias and variance in model construction, or loosely speaking that of
precision and complexity of the model.
The AIC is not a test on the model in the sense of hypothesis testing, rather it is a tool for Model
selection. Given a data set, several competing models may be ranked according to their AIC,
with the one having the lowest AIC being the best. From the AIC value one may infer that e.g
the top three models are in a tie and the rest are far worse, but one should not assign a value
above which a given model is 'rejected'.
Durbin- Watson Test:
The Durbin-Watson statistic is a test statistic used to detect the presence of autocorrelation in
the residuals from a regression analysis. Its value always lies between 0 and 4. A value of 2
indicates there appears to be no autocorrelation. If the Durbin-Watson statistic is substantially
less than 2, there is evidence of positive serial correlation. As a rough rule of thumb, if Durbin-
Watson is less than 1.0, there may be cause for alarm. Small values of d indicate successive error
terms are, on average, close in value to one another, or positively correlated. Large values of d
indicate successive error terms are, on average, much different in value to one another, or
negatively correlated.
THE BOX- JENKINS METHODOLOGY

The BJ methodology involves making the time series data stationary, but data series in itself does
not tell that whether the data follows purely AR process (and if so, what is the value of p) or a
purely MA process(and if so, what is the value of q) or an ARMA process (and if so, what are
33
the values of p and q) or an ARIMA process, in which case we must know the values of p, d, and
q. Thus we can divide the full methodology in four steps:
Identification of the Model:

First step of the application of The BJ methodology involves the identification of the model. The
chief tools in identification are the autocorrelation function (ACF), the partial
autocorrelation function (PACF), and the resulting correlograms, which are simply the plots
of ACFs and PACFs against the lag length.
If the analysis of data shows that time series is not stationary, we have to make it stationary
before we can apply the Box–Jenkins methodology. For making the series stationary we plotted
the first differences of stock price series. A formal application of the Dickey–Fuller unit root
test shows that whether the series is stationary or not. We can also check that whether the series
has become stationary or not, we can visually check from the estimated ACF and PACF
correlograms.
34
Parameter Estimation of the Model

Now the question arises whether the stock price data follows ARMA pattern. One way of
accomplishing this is to consider the ACF and PACF and the associated correlograms of a
selected number of ARMA processes, such as AR(1), AR(2), MA(1), MA(2), ARMA(1, 1),
ARIMA(2, 2), and so on. Since each of these stochastic processes exhibits typical patterns of
ACF and PACF, if the time series under study fits one of these patterns we can identify the time
series with that process. Next, we will require applying diagnostic tests to find out if the chosen
ARMA model is reasonably accurate.
Diagnostic Checking
How do we know that the model in is a reasonable fit to the data? One simple diagnostic is to
obtain residuals and obtain the ACF and PACF of these residuals, say, up to lag 25, then we see
that whether the estimated AC and PACF is individually statistically significant or not. In other
words, the correlograms of both autocorrelation and partial autocorrelation give the impression
that the residuals estimated from the model are purely random. Hence, we will be able to
conclude that the model used for estimation is reasonably correct and we do not require using
another ARMA or ARIMA model.
Forecasting:
Forecasting represent the most important aspect of this modeling process, To check the accuracy
of the modeling the result can be computed for In – sample data. In forecast E-views computes
(n-period-ahead) dynamic forecasts of an estimated equation. Forecast computes the forecast for
all observations in the current sample. As per the requirement instruction can be made to
compare the forecasted data to actual data, and to compute summary statistics.
35
Application of ARMA Modeling Process

In this report, I have checked the applicability of ARMA Model on the stock prices of Imclone
Systems Inc. (IMCL). Here, I have tried to make the data stationery so that the mean, variance
and autocovariance become constant over a period of time and in this way, the historical data
becomes a good predictor of the future data. All this application has been made using E-views
3.0.
If we take a look at the raw stock price data of IMCL (below Table 1), the correlogram shows a
high degree of auto-correlation (ACF) and partial auto-correlation (PACF). If an investor wants
to predict the future stock price on the basis of this data, the prediction will be far from being
correct. In such cases, we need to remove or minimize ACF and PACF from the data.
Table 1: Correlogram of Stock prices of IMCL before application of ARMA
Sample: 1/02/2006
4/04/2008
Included observations: 583
Partial
Autocorrelation Correlation AC PAC Q-Stat Prob
.|******** .|******** 1 0.983 0.983 566.75 0

.|*******| .|. | 2 0.966 -0.049 1114 0
.|*******| .|. | 3 0.948 0.001 1642.3 0
.|*******| .|. | 4 0.93 -0.031 2151.3 0
.|*******| .|. | 5 0.912 0.012 2642 0
.|*******| .|. | 6 0.895 0.004 3115.2 0
.|*******| .|. | 7 0.88 0.057 3573.5 0
.|*******| .|. | 8 0.866 0.015 4018 0
.|*******| .|. | 9 0.851 -0.038 4447.9 0
.|****** | .|. | 10 0.835 -0.022 4863.1 0
.|****** | .|. | 11 0.821 0.035 5265.1 0
.|****** | .|. | 12 0.809 0.045 5655.7 0
.|****** | .|. | 13 0.797 0.004 6035.3 0
.|****** | .|. | 14 0.785 0.016 6404.8 0
36
.|****** | .|. | 15 0.772 -0.054 6763.1 0

.|****** | .|. | 16 0.758 -0.05 7108.9 0
.|****** | .|. | 17 0.744 0.011 7442.8 0
.|****** | .|. | 18 0.73 -0.013 7764.6 0
.|****** | *|. | 19 0.713 -0.073 8072.3 0
.|***** | .|. | 20 0.696 -0.033 8365.8 0
.|***** | .|. | 21 0.681 0.05 8647.1 0
.|***** | *|. | 22 0.664 -0.061 8915.1 0
.|***** | .|. | 23 0.648 0.026 9171 0
.|***** | .|. | 24 0.634 0.029 9416 0
.|***** | .|. | 25 0.619 -0.021 9650.2 0
.|***** | .|. | 26 0.604 -0.036 9873.5 0
.|**** | .|. | 27 0.588 -0.021 10086 0
To do so, we first need to check the type of the data in order to apply correct model on it. This
can be done by applying a unit root test on the data. In this case, I‟ve done a first difference
Augmented Dickey-Fuller test to check the unit root. This test assumes the null hypothesis that
there is a unit root in the data. Here, the absolute value of ADF test comes out to be 23.4, which
is greater than the tabulated values at 1%, 5% and 10% level of significance. Hence, we do not
accept the null hypothesis and conclude that the data doesn‟t follow a static pattern and is not
affected by the past data.
Table 2: Test of Unit Root at 1st Difference
ADF Test Statistic -23.43528 1% Critical Value* -2.5692

5% Critical Value -1.9400
10% Critical Value -1.6159
*MacKinnon critical values for rejection of hypothesis of a unit root.
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(IMCLP,2)
Method: Least Squares
Sample(adjusted): 1/04/2006 3/27/2008

Included observations: 582 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.

D(IMCLP(-1)) -0.972967 0.041517 -23.43528 0.0000
37
R-squared 0.485936 Mean dependent var -0.002194

Adjusted R-squared 0.485936 S.D. dependent var 1.279607
S.E. of regression 0.917456 Akaike info criterion 2.667292
Sum squared resid 489.0424 Schwarz criterion 2.674795
Log likelihood -775.1820 Durbin-Watson stat 1.997268
Now, by looking at the correlogram, we need to apply the correct model. If autocorrelation is
high in the data, then we need to apply MA(1) process and if there is high partial autocorrelation
in the data, then we need to apply AR(1) process. We need to check the probability values at the
rightmost column of the table below, these values should be greater than 0.05. If they are not, we
need to apply another model like AR(2), MA(2), etc.
In this case, we get the desired probabilities of greater than 0.05 after applying AR(1) MA(1)
model. Now, the data has been made stationery and the future values can be forecasted on the
basis of this data (data pattern presented in Table 3 below).
Table3: Correlogram of IMCL Stock price after application of ARMA Modeling process
Sample: 1/03/2006 3/27/2008

Included observations: 583
Q-statistic probabilities adjusted for 2
ARMA term(s)
Partial Q-
Autocorrelation Correlation AC PAC Stat Prob
.|. | .|. | 1 -0.003 -0.003 0.0069

.|. | .|. | 2 -0.001 -0.001 0.0081
.|. | .|. | 3 0.012 0.012 0.0951 0.758
.|. | .|. | 4 0 0 0.0951 0.954
.|. | .|. | 5 -0.019 -0.019 0.3056 0.959
.|. | .|. | 6 -0.035 -0.035 1.0364 0.904
.|. | .|. | 7 -0.01 -0.011 1.0989 0.954
.|. | .|. | 8 0.041 0.041 2.0803 0.912
.|. | .|. | 9 0.047 0.048 3.3725 0.849
.|. | .|. | 10 -0.047 -0.047 4.6692 0.792
.|. | .|. | 11 -0.042 -0.045 5.7022 0.769
.|. | .|. | 12 0.003 0 5.7087 0.839
.|. | .|. | 13 -0.028 -0.026 6.1861 0.861
38
.|. | .|. | 14 0.054 0.06 7.9023 0.793

.|. | .|. | 15 0.033 0.036 8.553 0.806
.|. | .|. | 16 0.026 0.022 8.9694 0.833
.|. | .|. | 17 -0.008 -0.018 9.005 0.877
.|* | .|* | 18 0.1 0.1 15.07 0.52
.|. | .|. | 19 0.038 0.048 15.961 0.527
.|. | .|. | 20 -0.041 -0.034 16.975 0.525
.|* | .|* | 21 0.067 0.067 19.666 0.415
.|. | .|. | 22 -0.049 -0.052 21.1 0.391
.|. | .|. | 23 -0.032 -0.04 21.706 0.417
.|. | .|. | 24 -0.027 -0.022 22.14 0.452
.|. | .|. | 25 0.028 0.042 22.626 0.483
.|. | .|. | 26 0.007 0.005 22.655 0.54
.|. | .|. | 27 0.052 0.047 24.322 0.501
.|. | .|. | 28 0.059 0.065 26.489 0.436
.|. | .|. | 29 -0.026 -0.025 26.913 0.468
.|. | .|. | 30 0.045 0.037 28.155 0.456
Table4: Table values after application of Estimation Model
Dependent Variable: IMCLP

Method: Least Squares
Date: 05/19/08 Time: 22:25
Sample(adjusted): 1/03/2006 3/26/2008
Included observations: 582 after adjusting endpoints
Convergence achieved after 6 iterations
Backcast: 1/02/2006
Variable Coefficient Std. Error t-Statistic Prob.
C 38.50448 3.313260 11.62132 0.0000
AR(1) 0.987554 0.007243 136.3507 0.0000
MA(1) 0.037714 0.042169 0.894354 0.3715
R-squared 0.972693 Mean dependent var 36.81792
Adjusted R-squared 0.972598 S.D. dependent var 5.524518
S.E. of regression 0.914500 Akaike info criterion 2.664262
Sum squared resid 484.2235 Schwarz criterion 2.686770
Log likelihood -772.3004 F-statistic 10312.01
Durbin-Watson stat 1.998543 Prob(F-statistic) 0.000000
Inverted AR Roots .99
Inverted MA Roots -.04
39
Figure 7: In- Sample prediction of stock Price for the period of 1 month
To check the accuracy of the model, I did an in-sample test. In this test, I checked for the values
predicted by the model which were originally supplied to it before the application of unit root
test. Here, in the graph, the blue line shows the predicted value of the stock on the given time,
and the red lines show the standard error in the prediction.
40
Table 5: Model Accuracy check for in-sample prediction
The accuracy of the model can be checked by the Theil Inequality Coefficient (Refer Table 5),
which should be closer to zero in order to make the model accurate; and Covariance Coefficient,
which should be as high as possible. In this case, the value for Theil Inequality Coefficient is
comes out to be 0.010083, which is quite closer to zero. Also, the value of Covariance
Coefficient comes out to be 0.973. So we can say that the model is accurate enough to predict the
in sample future values.
However, the actual soundness of the model can be checked only by out sample test, which could
not be carried out due to insufficiency of time and limitation of my knowledge in the concerned
field.
41
Comparative Analysis of Effect of Dividend Declaration on

Stock Return Using Risk adjusted and Single Index Model
The one of the objective of the project, as already stated, is to find out the impact of major events
and to establish the time length of impact of these events on the stock price return. Since the
event analysis does not follow any specific method and different research papers have used
different methodology to substantiate the effect of the event on stock price return, therefore in
this analysis I have used Risk Adjusted Method of analysis to substantiate my result and to make
a comparative study between Single Index and Risk adjusted model. The description regarding
the application of Single index model has been given in interim report, here the application
process of Risk Adjusted model has been explained.
DATA COLLECTION
Data is collected from three different sources. For the events data of Dividend in the years 2007
and 2008, our company‟s website m4dataquest.com is used, as the data is available in the easiest
format on this website. However, in cases where company doesn‟t have database for any quarter,
I collected this data from the official website of the company. The data for the event of Dividend
is collected using these two sources. For the data regarding the stock prices of the company,
Yahoo Finance is used. Also, to collect the corresponding data for the S&P 500 index, the same
website is used.
SAMPLE
42
For undertaking this analysis, a same sample of 78 major Dividend Declaration events was taken,
which has been used for Single Index Model. All the events were distributed across the different
sector. The sampling method has been used here is “Judgmental Sampling”
OUTLINE OF THE ANALYSIS
The main aim of this analysis is to establish how share prices return patterns around various
critical corporate action processing dates in both the model.
Event Window: Event window is defined as the period over which the impact of the event is
studied. During this period, the stock is expected to give a different return than normal returns in
the absence of the event. In this study, the event window is taken of -15 to +15 days of the
occurring of the event.
Estimation Window: Estimation window is defined as the period over which the normal return
of the stock is calculated. During this period, the stock is assumed to give the normal returns.
This period is taken as to be free from any sudden event or announcement. Generally, this
window is taken for as many numbers of days as possible in order to smoothen out the effect of
any unwanted or abnormal event. In this study, the estimation window is taken for a period of 30
trading days before the occurrence of the event. This window takes into account is of 30 trading
days (i.e. -60 to -30 days) of the stock. It is assumed that in such a long period, the effect of all
the events is averaged out and nullified.
43
DEFINITIONS OF VARIABLES
The empirical analysis presented in this report focuses on share price behavior around dividend
declaration dates. This section sets out definitions of the variables used in this study.
Share Price Return: Share price return is defined as the change in share price of the company
over its previous closing price. For the purpose of adjustment of risk the 10 Yr. US T- Bills rate
has been discounted from this return. It is calculated as:
((Pt – Pt-1) / Pt-1)-Rf
METHODOLOGY
The methodology used in this study involves the use of the Risk Adjusted Model. This model
helps in finding the significance of the share price returns generated during the event window.
To begin with, let us assume a null and an alternative hypothesis,
H0: Dividend declaration does not create stock price volatility

H1: Dividend declaration creates stock price volatility
This method requires a data set of two variables, one dependent and one independent, to apply
the regression model. For this purpose, risk adjusted share price return is taken as dependent
variable and risk adjusted market return is taken as the independent variable. Applying
regression model on these variables, the values of alpha and beta are calculated.
44
Then, a regression equation is developed to calculate the expected return of the share during the
event window. The regression equation used is:
where,
α - is the constant return on the share, irrespective of other factors.
β – is the slope of the equation, or the sensitivity of the stock return towards the market return.
Then, the risk free rate has been discounted from expected return and it is compared with the
actual adjusted T bills return and the difference of the two is termed as „the abnormal return‟.
The variance and standard error for this abnormal return are calculated and a z-test is applied and
the standardized values are calculated using the formula,
where,
x – is the average abnormal return of the sample events
µ - is the abnormal return of the whole population (assumed to be zero)
ℴ - is the standard error of the sample
This standardized z-value is compared with the critical z-value and if the standardized value is
greater than the critical value, the event is considered to have generated abnormal return on that
day.
45
When Companies Make Dividend Surprise (Abnormal

Return)
KEY FINDINGS & CONCLUSION
Comparing for the abnormal returns in both Risk Adjusted and Single Index Model, the
following results were found:
 During the event window of 10 days, the standardized z-value is smaller than the critical
z-value for all the days except Day 0, Day 1, Day 2 and Day 5 at 10% level of
significance in case of Single Index Model, While the Abnormal return was significant
just on Day 0 in case of Risk Adjusted model.
 In case of analysis with Single Index the null hypothesis is accepted for rest of days and it
is proved that significant difference between the share price return of estimation window
and event window last for 2 days after the event happens, but in case of analysis with
Risk adjusted model the Zcritical value shows the same pattern for the next three days but it
is not significant except on Day 0.
 The abnormal return from the Single index model shows a clear pattern of return, which
start 1 day before the event and last for next 2 days, while in case of Risk Adjusted
model, it does not show any clear pattern, it start 4 days before the event and last for next
3 days after event, showing peak on event day.
 It can be concluded from the above test that the event Dividend (surprise) does not
generate any significant abnormal share price returns for the full event window but last
for few days after the event.
46
Figure 8: Abnormal Return during Event Window (Using Single Index Model)
MeanAR
0.80%
0.60%
0.40%
0.20%
0.00%
-0.20%
-0.40%
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Figure 9: Abnormal Return during Event Window (Using Risk Adjusted Model)
0.80%
0.60%
0.40%
0.20%
0.00%
-0.20%
-0.40%
-0.60%
47
Figure 10: Pre and Post Event CUM Ab. Return (Single Index Model)
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
Pre Event Event Day Post Event
-0.10%
Figure 11: Pre and Post Event CUM Ab. Return (Risk Adjusted Model)
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Pre Event Event date Post Event
48
Table 6: Calculation of significance of Ab. Return during event window (Single Index Model)
MeanAR STD STDErr Z Score Significance Day

0.0028 0.014714 0.00171 1.663863 ***** -10
-0.0013 0.015454 0.001796 -0.69594 ~ -9
-0.0003 0.012385 0.00144 -0.2151 ~ -8
0.0011 0.015177 0.001764 0.608037 ~ -7
-0.0039 0.023863 0.002774 -1.39177 ~ -6
-0.0033 0.039801 0.004627 -0.7184 ~ -5
-0.0007 0.017879 0.002078 -0.33865 ~ -4
-0.0008 0.014872 0.001729 -0.44227 ~ -3
-0.0001 0.017541 0.002039 -0.04959 ~ -2
0.0022 0.020602 0.002395 0.908352 ~ -1
0.0066 0.025804 0.003 2.202472 ***** 0
0.0060 0.01908 0.002218 2.703373 ***** 1
0.0052 0.025638 0.00298 1.735902 ***** 2
-0.0005 0.032941 0.003829 -0.13263 ~ 3
-0.0013 0.015258 0.001774 -0.73952 ~ 4
0.0038 0.019448 0.002261 1.684305 ***** 5
-0.0012 0.018039 0.002097 -0.56872 ~ 6
-0.0002 0.021545 0.002505 -0.09208 ~ 7
-0.0010 0.019981 0.002323 -0.41908 ~ 8
0.0027 0.017673 0.002054 1.304271 ~ 9
0.0005 0.018462 0.002146 0.248394 ~ 10
****z calculated is more than z tabulated at 10% significance level
~~~~z calculated is less than z tabulated at 10% significance level
49
Table 7: Calculation of significance of Ab. Return during event window (Risk Adjusted Model)
Critical Z Critical Z
Event Value at Value at
Window MEAN Rt. St. DEV. St. Error Z Value 5% level 10% level
D-15 0.000209 0.016296 0.002006 0.104405 1.96 1.65

D-14 0.000785 0.017305 0.00213 0.368394 1.96 1.65
D-13 0.001016 0.015357 0.00189 0.537304 1.96 1.65
D-12 0.003721 0.022894 0.002818 1.32046 1.96 1.65
D-11 0.001571 0.022839 0.002811 0.558783 1.96 1.65
D-10 -0.0034 0.018027 0.002219 -1.53069 1.96 1.65
D-9 0.000142 0.019571 0.002409 0.059114 1.96 1.65
D-8 0.002216 0.012927 0.001591 1.392571 1.96 1.65
D-7 -0.00052 0.013815 0.001701 -0.30834 1.96 1.65
D-6 0.005797 0.026949 0.003317 1.747623 1.96 1.65
D-5 0.006 0.041559 0.005116 1.172931 1.96 1.65
D-4 0.000955 0.02044 0.002516 0.379518 1.96 1.65
D-3 0.002706 0.018651 0.002296 1.178613 1.96 1.65
D-2 0.001774 0.02072 0.002551 0.695404 1.96 1.65
D-1 0.001482 0.022894 0.002818 0.525843 1.96 1.65
D 0.00702 0.028705 0.003533 1.986792 1.96 1.65
D+1 0.003829 0.021988 0.002707 1.414757 1.96 1.65
D+2 0.004829 0.026936 0.003316 1.456459 1.96 1.65
D+3 0.002147 0.016699 0.002055 1.044419 1.96 1.65
D+4 0.001502 0.019298 0.002375 0.632353 1.96 1.65
D+5 -0.00404 0.020136 0.002479 -1.63094 1.96 1.65
D+6 0.001455 0.021008 0.002586 0.562589 1.96 1.65
D+7 0.001564 0.023424 0.002883 0.542467 1.96 1.65
D+8 0.001793 0.022827 0.00281 0.638289 1.96 1.65
D+9 -0.00145 0.021949 0.002702 -0.53628 1.96 1.65
D+10 0.001032 0.024011 0.002956 0.349104 1.96 1.65
D+11 -0.00314 0.031438 0.00387 -0.81239 1.96 1.65
D+12 0.000362 0.023572 0.002901 0.124919 1.96 1.65
D+13 -0.00233 0.023705 0.002918 -0.79971 1.96 1.65
D+14 0.000612 0.019891 0.002448 0.250008 1.96 1.65
D+15 0.003432 0.025013 0.003079 1.114552 1.96 1.65
50
When Companies Make Dividend Surprise (Increases dividend

between 0 to 10%)
Comparing for the abnormal returns in both Risk Adjusted and Single Index Model for 0 t o10%
dividend increase cases, the following results were found:
z-value for all the days except Day 2 at 10% level of significance in case of Single Index
Model, while the Abnormal return was significant on most of days except on event day in
the 10 days event window in case of Risk Adjusted model.
and event window except on D+2, but in case of analysis with Risk adjusted model the
Zcritical value shows significant on most of days except on Day 0.
model, it does not show any clear pattern, rather in most of the cases it does not give any
abnormal return or may say gives negative abnormal return.
 Even though both the models show a different pattern but It can be concluded from the
investors point of view that the event Dividend (surprise of 10 to 20%) does not generate
any significant abnormal share price returns for the full event window and is not of much
economic significance for the investor.
51
Figure 13: Abnormal Return during event window through Single Index model
Mean AR
0.80%
0.60%
0.40%
0.20%
Mean AR
0.00%
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
-0.20%
-0.40%
-0.60%
Figure 13: Abnormal Return during event window through risk adjusted model
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
52
Figure 15: Cumulative Abnormal Return during event window through Single Index model
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
Figure 15: Cumulative Abnormal Return during event window through risk adjusted model
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
53
Table 8: Calculation of Significance of Abnormal Return during event window (Using Single Index
Model)

0.0041 0.011542 0.002356 1.755496 ***** -10
-0.0019 0.010728 0.00219 -0.87397 ~ -9
-0.0006 0.009583 0.001956 -0.31526 ~ -8
-0.0010 0.010466 0.002136 -0.46351 ~ -7
-0.0013 0.014771 0.003015 -0.42564 ~ -6
-0.0017 0.019646 0.00401 -0.43223 ~ -5
-0.0001 0.012978 0.002649 -0.03985 ~ -4
-0.0014 0.013772 0.002811 -0.48862 ~ -3
0.0007 0.015306 0.003124 0.233387 ~ -2
-0.0001 0.013679 0.002792 -0.04626 ~ -1
0.0054 0.017329 0.003537 1.515998 ~ 0
0.0044 0.015641 0.003193 1.365998 ~ 1
0.0062 0.015818 0.003229 1.923241 ***** 2
0.0045 0.015607 0.003186 1.42605 ~ 3
-0.0002 0.015584 0.003181 -0.05763 ~ 4
0.0036 0.017353 0.003542 1.025322 ~ 5
-0.0024 0.01893 0.003864 -0.62542 ~ 6
-0.0051 0.019655 0.004012 -1.27742 ~ 7
-0.0013 0.020229 0.004129 -0.32661 ~ 8
0.0062 0.017812 0.003636 1.698365 ***** 9
0.0048 0.013725 0.002802 1.706382 ***** 10
54
Table9: Calculation of significance of Abnormal Return during event window (Using Risk Adjusted
Model)
D-15 -0.00339 0.01075 0.001323 -2.5645 1.96 1.65

D-14 0.010437 0.019016 0.002341 4.458839 1.96 1.65
D-13 0.009716 0.014693 0.001809 5.371938 1.96 1.65
D-12 -0.0059 0.033515 0.004125 -1.43042 1.96 1.65
D-11 0.009379 0.031449 0.003871 2.422849 1.96 1.65
D-10 0.002794 0.015086 0.001857 1.504635 1.96 1.65
D-9 -0.0007 0.016203 0.001994 -0.34948 1.96 1.65
D-8 0.003732 0.011037 0.001359 2.74719 1.96 1.65
D-7 0.001109 0.01351 0.001663 0.666874 1.96 1.65
D-6 0.004979 0.021028 0.002588 1.923679 1.96 1.65
D-5 0.006638 0.021048 0.002591 2.562182 1.96 1.65
D-4 0.014477 0.016364 0.002014 7.187021 1.96 1.65
D-3 -0.00535 0.019098 0.002351 -2.27466 1.96 1.65
D-2 -0.00215 0.019242 0.002369 -0.90587 1.96 1.65
D-1 0.003151 0.016568 0.002039 1.545291 1.96 1.65
D -0.00221 0.021112 0.002599 -0.85003 1.96 1.65
D+1 -0.00122 0.020598 0.002535 -0.48253 1.96 1.65
D+2 0.004342 0.016217 0.001996 2.175177 1.96 1.65
D+3 -0.01113 0.016684 0.002054 -5.41973 1.96 1.65
D+4 -0.00708 0.015484 0.001906 -3.71351 1.96 1.65
D+5 0.00939 0.016882 0.002078 4.518755 1.96 1.65
D+6 0.001785 0.019164 0.002359 0.756822 1.96 1.65
D+7 0.002815 0.023008 0.002832 0.993865 1.96 1.65
D+8 0.008657 0.025163 0.003097 2.794813 1.96 1.65
D+9 -0.0208 0.019778 0.002435 -8.54203 1.96 1.65
D+10 -0.01991 0.02513 0.003093 -6.43779 1.96 1.65
D+11 0.014442 0.020321 0.002501 5.773619 1.96 1.65
D+12 -0.00056 0.020558 0.002531 -0.22295 1.96 1.65
D+13 0.015192 0.025429 0.00313 4.85357 1.96 1.65
D+14 0.013194 0.01616 0.001989 6.632891 1.96 1.65
D+15 0.033728 0.021404 0.002635 12.80176 1.96 1.65
55

between 10 to 20%)
Comparing for the abnormal returns in both Risk Adjusted and Single Index Model for 10 to
20% dividend increase, the following results were found:
z-value for all the days except Day -5 at 10% level of significance in case of Single Index
Model, while the same kind of result was also presented by Risk Adjusted model. The
significance result at Day -5 also does not lead to any conclusion that whether this is due
to the effect of event itself.
and event window exist on D-5 days, but in case of analysis with Risk adjusted model the
Zcritical value shows the same pattern and is significant on D -5, D -3.
start 1 day before the event and remain positive just on event day, while in case of Risk
Adjusted model, it does not show any clear pattern, event on day 0 it shows negligible
abnormal return..
 It can be concluded from the above test that the event Dividend (surprise of 10 to 20%)
does not generate any significant abnormal share price returns for the full event window.
56
Figure 16: Abnormal return during event window (Single Index Model)
Mean AR
0.80%
0.60%
0.40%
0.20%
Mean AR
0.00%
-0.20%
-0.40%
-0.60%
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Figure 17: Abnormal return during event window (Risk Adjusted model)
1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
57
Figure 18: Cumulative Abnormal return during event window (Single Index Model)
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
-0.10%
Figure 19: Cumulative Abnormal return during event window (Risk Adjusted model)
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
58
Table 10: Calculation of significance of Abnormal Return (Single Index Model)

0.0079 0.013351 0.003238 1.885634 ***** -10
0.0022 0.009359 0.00227 0.181403 ~ -9
0.0009 0.006484 0.001573 -0.55735 ~ -8
0.0072 0.01995 0.004839 1.112362 ~ -7
-0.0002 0.010417 0.002526 -0.80561 ~ -6
-0.0038 0.010836 0.002628 -2.14654 ***** -5
0.0038 0.017802 0.004318 0.461844 ~ -4
-0.0022 0.012733 0.003088 -1.27997 ~ -3
-0.0001 0.013425 0.003256 -0.58897 ~ -2
0.0056 0.018685 0.004532 0.835932 ~ -1
0.0057 0.019998 0.00485 0.810165 ~ 0
-0.0028 0.020054 0.004864 -0.94818 ~ 1
-0.0007 0.015354 0.003724 -0.68396 ~ 2
0.0010 0.015925 0.003862 -0.2056 ~ 3
-0.0023 0.019348 0.004693 -0.86368 ~ 4
-0.0008 0.01245 0.00302 -0.86496 ~ 5
0.0011 0.014512 0.00352 -0.18718 ~ 6
0.0004 0.016511 0.004004 -0.34961 ~ 7
0.0034 0.010154 0.002463 0.644895 ~ 8
0.0047 0.012255 0.002972 0.991512 ~ 9
0.0071 0.021463 0.005206 1.015864 ~ 10
59
Table 11: Calculation of significance of Abnormal Return (Single Index Model)
D-15 0.005467 0.013755 0.001693 3.229122 1.96 1.65

D-14 0.006012 0.011738 0.001445 4.161157 1.96 1.65
D-13 0.005644 0.014803 0.001822 3.097647 1.96 1.65
D-12 0.001859 0.0161 0.001982 0.938151 1.96 1.65
D-11 0.001001 0.016285 0.002005 0.499352 1.96 1.65
D-10 -0.00325 0.016001 0.00197 -1.64853 1.96 1.65
D-9 -0.00076 0.01429 0.001759 -0.43012 1.96 1.65
D-8 0.000394 0.011054 0.001361 0.289873 1.96 1.65
D-7 -0.00203 0.011726 0.001443 -1.4046 1.96 1.65
D-6 0.002947 0.014783 0.00182 1.619598 1.96 1.65
D-5 0.004559 0.013567 0.00167 2.729996 1.96 1.65
D-4 0.001775 0.026728 0.00329 0.539479 1.96 1.65
D-3 0.007041 0.019366 0.002384 2.953758 1.96 1.65
D-2 0.003149 0.01555 0.001914 1.645272 1.96 1.65
D-1 -0.00165 0.020166 0.002482 -0.66587 1.96 1.65
D -0.00204 0.019362 0.002383 -0.85504 1.96 1.65
D+1 0.003833 0.020403 0.002511 1.526113 1.96 1.65
D+2 0.001457 0.014783 0.00182 0.800791 1.96 1.65
D+3 0.001306 0.013121 0.001615 0.808758 1.96 1.65
D+4 0.003924 0.023021 0.002834 1.384844 1.96 1.65
D+5 0.000342 0.013196 0.001624 0.210315 1.96 1.65
D+6 0.003155 0.019375 0.002385 1.322976 1.96 1.65
D+7 0.000854 0.018829 0.002318 0.368359 1.96 1.65
D+8 -0.00085 0.014448 0.001778 -0.48031 1.96 1.65
D+9 -0.00216 0.012662 0.001559 -1.38698 1.96 1.65
D+10 -0.00751 0.027414 0.003374 -2.22634 1.96 1.65
D+11 0.000806 0.018328 0.002256 0.357208 1.96 1.65
D+12 0.013408 0.022374 0.002754 4.868602 1.96 1.65
D+13 0.000251 0.022077 0.002718 0.092182 1.96 1.65
D+14 0.007162 0.021888 0.002694 2.658443 1.96 1.65
D+15 0.002567 0.018711 0.002303 1.114559 1.96 1.65
60

between 20 to 50%)
Comparing for the abnormal returns in both Risk Adjusted and Single Index Model for 20 to
50% dividend increase case, the following results were found:
z-value for all the days except Day-9, Day-8, Day-2 and Day 10 at 10% level of
significance in case of Single Index Model, While the Abnormal return was significant
just on Day 0, Day 1and day 5, 8, 10 in case of Risk Adjusted model.
and event window occurs 2 days before the event happens, but in case of analysis with
Risk adjusted model the Zcritical value shows a substantial significant value on Day0, Day
1.
model, it shows the same pattern, except on Day 3 where the abnormal return dips in this
model.
 It can be concluded from the above test that even the Dividend (surprise of 20 to 50%) is
not able to generate significant abnormal share price returns for a continuous period of
time.
61
Figure 20: Abnormal Return during event window (Single Index Model)
MeanAR
1.20%
1.00%
0.80%
0.60%
0.40%
0.20% MeanAR
0.00%
-0.20% -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
-0.40%
-0.60%
-0.80%
Figure 21: Abnormal Return during event window (Risk Adjusted Model)
1.50%
1.00%
0.50%
0.00%
D-9
D-7
D-5
D-3
D-1
D+1
D+3
D+5
D+7
D+9
D-11
D-15
D-13
D+13
D+11
D+15
-0.50%
-1.00%
62
Figure 22: Cum Abnormal return during event window (Single Index Model)
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
-0.20%
Figure 23: Cum Abnormal return during event window (Risk Adjusted Model)
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
-0.20% Pre Event Event date Post Event
63
Table 12: Calculation of significance of abnormal return during event window (Single Index
model)

0.0006 0.008243 0.001999 0.10298 ~ -10
-0.0060 0.015845 0.003843 -1.67148 ***** -9
-0.0062 0.01351 0.003277 -2.02136 ***** -8
-0.0038 0.013793 0.003345 -1.25022 ~ -7
-0.0032 0.024881 0.006035 -0.59656 ~ -6
-0.0013 0.008231 0.001996 -0.82799 ~ -5
0.0022 0.013052 0.003165 0.568633 ~ -4
0.0037 0.012507 0.003033 1.080158 ~ -3
0.0075 0.013616 0.003302 2.144603 ***** -2
-0.0023 0.016999 0.004123 -0.65632 ~ -1
0.0101 0.025137 0.006097 1.588134 ~ 0
0.0058 0.015909 0.003858 1.404088 ~ 1
0.0043 0.014505 0.003518 1.108601 ~ 2
-0.0008 0.012896 0.003128 -0.39871 ~ 3
-0.0003 0.014017 0.0034 -0.19899 ~ 4
0.0036 0.012441 0.003017 1.068311 ~ 5
-0.0016 0.008932 0.002166 -0.9341 ~ 6
-0.0009 0.01167 0.00283 -0.45722 ~ 7
-0.0029 0.016489 0.003999 -0.81489 ~ 8
0.0038 0.01305 0.003165 1.066799 ~ 9
.-0.0047 0.012446 0.003019 -1.69345 ***** 10
64
Table 13: Calculation of significance of abnormal return during event window (Risk Adjusted
Model)
D-15 -0.00605 0.019784 0.002435 -2.4836 1.96 1.65

D-14 -0.00187 0.018091 0.002227 -0.83851 1.96 1.65
D-13 -0.00239 0.016992 0.002092 -1.14509 1.96 1.65
D-12 0.005322 0.016005 0.00197 2.701443 1.96 1.65
D-11 -0.00308 0.017689 0.002177 -1.414 1.96 1.65
D-10 -0.00384 0.023379 0.002878 -1.33577 1.96 1.65
D-9 -0.00102 0.025016 0.003079 -0.33233 1.96 1.65
D-8 0.004032 0.015871 0.001954 2.064015 1.96 1.65
D-7 0.001463 0.016449 0.002025 0.722718 1.96 1.65
D-6 0.007569 0.023617 0.002907 2.603586 1.96 1.65
D-5 0.006364 0.063322 0.007794 0.816537 1.96 1.65
D-4 -0.00063 0.016788 0.002067 -0.30309 1.96 1.65
D-3 -0.00098 0.016853 0.002075 -0.47307 1.96 1.65
D-2 -0.00427 0.018967 0.002335 -1.82794 1.96 1.65
D-1 -0.00154 0.028946 0.003563 -0.43176 1.96 1.65
D 0.01496 0.033988 0.004184 3.575823 1.96 1.65
D+1 0.00953 0.0196 0.002413 3.950173 1.96 1.65
D+2 -0.00767 0.039354 0.004844 -1.5838 1.96 1.65
D+3 -0.0017 0.019065 0.002347 -0.72503 1.96 1.65
D+4 0.001381 0.020157 0.002481 0.556579 1.96 1.65
D+5 -0.00694 0.021827 0.002687 -2.58273 1.96 1.65
D+6 0.003916 0.021423 0.002637 1.485215 1.96 1.65
D+7 -0.00239 0.022385 0.002755 -0.86758 1.96 1.65
D+8 0.009786 0.017566 0.002162 4.526152 1.96 1.65
D+9 0.003557 0.028135 0.003463 1.026969 1.96 1.65
D+10 0.00713 0.015481 0.001906 3.741774 1.96 1.65
D+11 0.000288 0.02544 0.003131 0.092068 1.96 1.65
D+12 -0.00746 0.023833 0.002934 -2.54231 1.96 1.65
D+13 -0.00369 0.020777 0.002557 -1.44093 1.96 1.65
D+14 0.000638 0.020832 0.002564 0.248802 1.96 1.65
D+15 0.010076 0.028071 0.003455 2.916102 1.96 1.65
65
Cross Sectional Regression Analysis
The one of the objective of the project, as already stated, is to find out the impact of major events
and to establish the time length of impact of these events on the stock price and trading volume.
To substantiate this objective and to find out that whether the investor use to be just an event
driven investor or he/she considers the other financials of the company before acting on a
particular event and investing in a particular scrip this analysis has been undertaken.
SCOPE OF THE ANALYSIS
There can be the different financial factors which an investor can consider before investing in a
particular stock. Considering the vast nature of these factors, the analysis has been limited to
some of the important factors like Debt-Equity Ratio, Price Earnings Ratio, and Increase in
Dividend (percentage increase in dividend), Dividend Yield and Dividend Payout Ratio.
DATA COLLECTION
Data is collected from two different sources. For the events data of Dividend in the years 2007
and 2008, our company‟s website m4dataquest.com is used, as the data is available in the easiest
format on this website and for the data regarding the different financial ratios of the company,
Yahoo Finance and Thomson Reuters has been used.
SAMPLE
A sample of 35 major Dividend Declaration events was taken from the list of 92 companies,
which has been used for event analysis. All the companies were distributed across the sector. The
sampling method has been used here is “Judgmental Sampling”
66
DEFINITION OF VARIABLES
The empirical analysis presented in this report focuses on finding out the financial factors
considered before investing on a particular event. This section sets out definitions of the
variables used in this study.
Cumulative Abnormal return: Cumulative Abnormal return or popularly known as CAR is

defined as the sum of abnormal return for specific number of days. Here the CAR has been
calculated after taking event window of -1,+1 days.
Dividend Increases: Dividend increase is calculated by comparing the present quarter dividend
declared with that of previous year same quarter or previous quarter. Here to give more weight
age to the analysis along with calculating the percent increase, it has been clustered in different
slabs.
METHODOLOGY
Dependent Variable: Cumulative Abnormal return of (-1,+1 days) has been taken as dependent
variable.
Independent Variable: The independent variable has been taken as Dividend Payout ratio,
Dividend Yield, P/E ratio and dividend increase as dummy variable. After testing for Multi-co
linearity P/E ratio as an independent variable has been dropped from analysis.
Dummy Variable: Increase in the dividend has been clustered in three different scenario i.e. 0 to
10% increase, 10 to 20% increase, 20 to 50% increase. Here
D1 Increase of dividend between 10 to 20%

D2 Increase of dividend between 0 to 10%
Intercept Increase of dividend between 20 to 50%
67
Result of the Regression Analysis

Regressing the independent financial variable against the CAR, the following results were found:
 The first regression analysis has been taken with all the independent variable, but the test
of Multi- Co linearity proves that there is high degree of co-relation between the dividend
payout ratio and P/E ratio, and therefore P/E ratio has been dropped from the analysis for
the second regression.
 As a very rough rule of thumb, a value of 0.15 or greater might be considered strong
evidence of a real relationship for cross sectional data and here the Value of R2 is 0.61
which present good linear relationship among the variable.
 Rule of thumb says that F value greater than 2 is considered good, here the value is 2.14.
 The independent variables like Dividend Increase (0 to 10, 10 to 20, 20 to 30) and
Dividend Yield is significantly affecting the CAR and Variable like dividend payout is
not making any significant impact. Even though the degree of effect of all these variables
on the dependent one is very negligible.
 In conclusion it can be said that an investor while taking the event driven investment
decision does not consider the other financials of the company and takes the decision on
the basis of importance of event.
68
APPLYING CROSS SECTION REGRESSION WITHOUT TESTING FOR MULTI- CO LINEARITY
Regression
Statistics
Multiple R 0.648307
R Square 0.420302
Adjusted R
Square 0.282279
Standard Error 0.025981
Observations 35
ANOVA
Significance
df SS MS F F
Regression 5 0.010278 0.002056 3.045157 0.032022
Residual 29 0.014175 0.000675
Total 34 0.024453
Coefficient Standard Lower Upper Lower Upper

s Error t Stat P-value 95% 95% 95.0% 95.0%
Intercep - 0.02927968 - 0.07144 - -
t 0.0555906 3 1.89861 4 0.11648 0.0053 0.11648 0.0053
0.01251891 0.18051 0.85847 - 0.02829 - 0.02829
D1 0.0022599 4 8 7 0.02377 4 0.02377 4
0.00792990 - 0.36165 - 0.00909 - 0.00909
D2 -0.007395 6 0.93255 3 0.02389 6 0.02389 6
- - 0.00576 - - - -
Payout 0.0008556 0.00027836 3.07375 1 0.00143 0.00028 0.00143 0.00028
0.00750237 1.85649 0.07746 - -
Yield 0.0139281 7 7 8 0.00167 0.02953 0.00167 0.02953
0.00128376 3.00032 0.00681 0.00118 0.00652 0.00118 0.00652
P/E 0.0038517 6 7 7 2 1 2 1
69
TESTING FOR MULTI-CO LINEARITY
Payout Yield
Payout 1
Yield 0.395851 1
P/E Payout
P/E 1
Payout 0.971233 1
Yield P/E
Yield 1
P/E 0.203673 1
APPLYING CROSS SECTION REGRESSION AFTER REMOVING MULTI- CO LINEARITY
Regression
Statistics
Multiple R 0.614495
R Square 0.171806
Adjusted R
Square 0.021226
Standard Error 0.03034
Observations 35
ANOVA
Significance
df SS MS F F
Regression 4 0.004201 0.00105 2.14096 0.36335282
Residual 30 0.020252 0.000921
Total 34 0.024453
70
Coefficient Standar Upper Lower Upper

s d Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercep 0.01218 2.17486 0.04066 0.05175 0.0012 0.05175
t 0.026494 2 8 9 0.0012303 7 3 7
- -
1.84542 0.80840 0.0267142 0.03388 0.0267 0.03388
D1 0.003586 0.01461 3 4 2 6 1 6
- -
0.00901 0.16964 0.0315067 0.00589 0.0315 0.00589
D2 -0.0128 8 -2.41993 3 4 7 1 7
- -
4.54E- 0.0001227 6.55E- 0.0001 6.55E-
Payout -2.9E-05 05 -0.63063 0.53478 1 05 2 05
-
0.00576 0.60412 0.00891 0.0149 0.00891
Yield -0.00303 1 -2.52604 4 -0.0149782 7 8 7
71
Limitations of Study
1. There can be more than one event taking place in the event window at one point in time; the
project covered only one event and its effect on share price performance.
2. The project did not consider macro economic factors for the purpose of analysis. Even though
the use of S&P 500 index (which is considered to be a market representator) discount the
macroeconomic factors to some extent, but discounting the real effect on all the stock of the
sample is not possible and the result might be influenced by these factors.
3. The result of the study presents the average abnormal return or volatility for all the companies
forming part of the sample, this result can‟t be generalized for any particular company.
4. The financial data of companies collected for Cross Sectional analysis has been taken from
different sources which varies among them. The source of data will be assumed to be authentic
and will be disclosed properly in the report.
5. The Out - sample prediction using ARMA could not be applied due to limitation of our
knowledge and understanding of the topic.
6. The benchmarking of the stock prices will be done with S&P 500 which is widely accepted
across the United States. There are other indices also which, If included in the study and may
yield different results.
72
SCOPE FOR FURTHER STUDY

ARMA model has been put into limited use in this study due to limitation of my knowledge. The
model can be refined more in order to make it applicable for an out-sample test. More research
can be carried out to make the model efficient enough to predict the future stock prices. Based on
this, a new metric can be developed which can be used in correspondence with the Single Index
and Risk Adjusted Models. This model would help an investor to predict the stock price of a
company in the absence of an event, which would be complemented by the Single Index Model
to estimate the returns generated due to a particular event. Thus, an investor can safely take his
position.
Moreover, the results arrived at by ARMA model can be made statistically more significant with
the use of ARCH and GARCH. In other words, the data can be refined more in order to make it a
true predictor of the future stock prices.
73
REFERENCES
1. Vindication of the Event Driven Investment Strategy: Research paper authored by Adam
T. Samson
2. News Events and Price Movements. Price Effects of Economic and Non-Economic
Publications in the News Media: Research paper published by Leipzig University,
authored by Thomas Schuster
3. An Empirical Analysis of Reactions to Dividend Policy Changes for NASDAQ Firms:
Research paper authored by Patricia A. Ryan, Scott Besley and Hei Wai Lee published in
Journal of Financial and Strategic Decisions Volume 13 Number 1, Year 2000
4. An Empirical Study on Stock Price Responses to the Release of the Environmental
Management Ranking in Japan: Research paper authored by Fumiko Takeda and
Takanori Tomozawa, published in Economics Bulletin, Vol. 13, Year 2006.
5. Announcement Effect and Price Pressure: An Empirical Study of Cross Border
Acquisitions by Indian Firms: Research paper published in International Research Journal
of Finance and Economics, Issue 13, 2008, authored by PengCheng Zhu and Shavin
Malhotra.
6. Basics of Econometrics, Authored by Prof. Damodran Gujrati,
7. http://www.eventvestor.com/index.php
8. http://www.eventvestor.com/evp_event.php?eid=153407
9. http://www.eventvestor.com/evp_event.php?eid=147202
74

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Event Based Financial Research 2008

EVENT BASED FINANCIAL RESEARCH Using

Amit Kr. Jaiswal

EVENT BASED FINANCIAL RESEARCH Using

A Report Submitted in Partial Fulfillment of the Requirements of MBA

7.8.1Key Findings and Conclusion………………………………………………….56

7.9 When companies Make Dividend surprise (20 to 50% increase)……………………62

1. Figure 1: Earnings Release of Lehman Brothers… …………………………………..…13

OBJECTIVES OF THE PROJECT

To establish and substantiate the impact of major events on stock prices.

WHAT IS THE IMPORTANCE OF AN EVENT?

WHAT IS EVENT ANALYSIS?

Analysis of Major Events

EVENT DRIVEN INVESTMENT STRATEGY:

EVENT DRIVEN INVESTMENT STRATEGY

Figure 3: Guidance Issued by Countrywide Financial

EVENT DRIVEN INVESTMENT STRATEGY

EVENT DRIVEN INVESTMENT STRATEGY

Figure 6: FDA Approval Received by Mentor Corp

EVENT DRIVEN INVESTMENT STRATEGY:

AN EMPIRICAL ANALYSIS OF REACTIONS TO DIVIDEND POLICY CHANGES FOR NASDAQ

Published in: Journal of Financial and Strategic Decisions Volume 13 Number 1

Objective of Study: To examine the information content of dividend policy

Insight of the Paper:

Usefulness for the Project

AN EMPIRICAL STUDY ON STOCK PRICE R ESPONSES TO THE RELEASE OF THE

Published in: Economics Bulletin, Vol. 13

Usefulness for the Project

ANNOUNCEMENT EFFECT AND PRICE PRESSURE: AN EMPIRICAL STUDY OF

Published in: International Research Journal of Finance and Economics, Issue 13

Usefulness for the Project

ARE RETAILING MERGERS ANTICOMPETITIVE? AN EVENT STUDY ANALYSIS

VINDICATION OF THE EVENT DRIVEN INVESTMENT STRATEGY

Author: Adam T. Samson

Objective of Study: To explain the usefulness of an Event Driven Investment Strategy

Usefulness for the Project

CORPORATE RESTRUCTURING IN JAPAN: AN EVENT STUDY ANALYSIS

Author: Jorge A. Chan-Lau

Published in: IMF Working Paper

Usefulness for the Project

Price Prediction Using the Box- Jenkins (BJ)

An Autoregressive (AR) Process:

Let Yt represent stock price at time t. If we model Yt as

A Moving Average (MA) Process:

If we model (Stock Prices) Y as follows:

An Autoregressive and Moving Average (ARMA) Process

Unit Root Test:

Dickey Fuller Test:

Akaike's information criterion:

Akaike's information criterion (AIC) is a measure of the goodness of fit of an estimated

Durbin- Watson Test:

THE BOX- JENKINS METHODOLOGY

Identification of the Model:

Parameter Estimation of the Model

Application of ARMA Modeling Process

Table 1: Correlogram of Stock prices of IMCL before application of ARMA

.|******** .|******** 1 0.983 0.983 566.75 0

.|****** | .|. | 15 0.772 -0.054 6763.1 0

Table 2: Test of Unit Root at 1st Difference

ADF Test Statistic -23.43528 1% Critical Value* -2.5692

.| .| 1 0.983 0.983 566.75 0