Treating cross-dependence in event studies: the Canadian income trust leak

Abstract

An alleged Canadian income trust announcement leak of 23 November 2005 provides a remarkable example of the sensitivity of event study analysis to the treatment of cross-sectional dependence in returns. Whereas a leak should chiefly have affected the returns on other securities, not income trusts, we find that a mechanical application of standard event study methodology yields the seemingly strong but spurious finding that income trust returns were affected. The treatment of cross-sectional dependence reverses this finding.