An analyst has tested the effect of spin-off announcements on share prices using event study methodology. The
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An analyst has tested the effect of spin-off announcements on share prices using event study methodology. The analyst’s procedure proceeded as follows:
a. Ten spin-offs were obtained from the most recent year.
b. Announcement dates were standardized with 30 days of prices collected from both before and announcement dates.
c. Returns were computed and averaged for each company in the spin-off sample.
Standard deviations and normal deviates were computed for the sample for each date. Appropriate tests for statistical significance were conducted.
d. Cumulative average residuals were computed for each date and tested for statistical significance.
Test results suggested that spin-offs were associated with 30-day returns of 8%. Why might an investor be skeptical of this test? How can the test be improved?
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