You Are Testing the Effect of Merger Announcements on Stock

question 84

Essay

You are testing the effect of merger announcements on stock prices.(This type of testing is called an "event study.") Your procedure is as follows:
Step 1: You select the twenty biggest mergers of the year.
Step 2: You isolate the date the merger becomes effective as the key date around which you will examine the data.
Step 3: You look at the returns for the five days after the effective merger date.
After looking at the returns in step 3 (you found an average of 0.13%),you conclude that you could not have made money on merger announcements.Are there any flaws that you can detect in this test? How could you correct for them? Can you devise a stronger test?

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Definitions:

Progressive Party

Political party created when former president Theodore Roosevelt broke away from the Republican Party to run for president again in 1912; the party supported progressive reforms similar to those of the Democrats but stopped short of seeking to eliminate trusts. Also the name of the party backing Robert La Follette for president in 1924.

Social Welfare Programs

Governmental initiatives designed to provide financial assistance and services to people in need, including the elderly, unemployed, disabled, and poor.

Civil Rights Proposals

Suggestions or measures put forward to protect individuals' freedoms and rights guaranteed by law, often focusing on ending discrimination and ensuring equal access to opportunities.