What should be the dependent variable in marketing-related event studies?

Bernd Skiera,Emanuel Bayer,Lisa Schöler

doi:10.1016/j.ijresmar.2017.01.002

Bernd Skiera, Emanuel Bayer + Show 1 more

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https://doi.org/10.1016/j.ijresmar.2017.01.002

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Abstract

Most event studies rely on cumulative abnormal returns, measured as percentage changes in stock prices, as their dependent variable. Stock price reflects the value of the operating business plus non-operating assets minus debt. Yet, many events, in particular in marketing, only influence the value of the operating business, but not non-operating assets and debt. For these cases, the authors argue that the cumulative abnormal return on the operating business, defined as the ratio between the cumulative abnormal return on stock price and the firm-specific leverage effect, is a more appropriate dependent variable. Ignoring the differences in firm-specific leverage effects inflates the impact of observations pertaining to firms with large debt and deflates those pertaining to firms with large non-operating assets. Observations of firms with high debt receive several times the weight attributed to firms with low debt. A simulation study and the reanalysis of three previously published marketing event studies shows that ignoring the firm-specific leverage effects influences an event study's results in unpredictable ways.

Highlights

Event studies, originally pioneered in accounting and finance, are a popular method for assessing the valuation that financial markets attribute to marketing-related events (Johnston, 2007; Sorescu, Warren, & Ertekin, 2017)
We show that results obtained in cross-sectional studies using CAROB instead of cumulative abnormal return on shareholder value (CARSHV) are likely to differ because heterogeneity in the firms' financial structures inflates the impact of observations pertaining to firms with large debt and deflates those pertaining to firms with large non-operating assets
We propose that when researchers use CARSHV as their dependent variable, they need to provide theoretical support to the claim that the analyzed event influences a firm's operating business and its non-operating assets and debt

Summary

Introduction

Originally pioneered in accounting and finance (for a review, see Corrado, 2011), are a popular method for assessing the valuation that financial markets attribute to marketing-related events (Johnston, 2007; Sorescu, Warren, & Ertekin, 2017) This method is based on the idea that the stock price reflects the true value of a firm (i.e., all discounted future cash flows) because it incorporates all relevant information. An event study entails collecting a sample of observations of one event type and in most cases, carrying out the following two steps: First, for each observation, the method estimates the cumulative abnormal percentage change in the stock price over a given time period around the event We call this change the cumulative abnormal percentage return on shareholder value (CARSHV). To identify determinants of this change, a regression is carried out in which CARSHV is the dependent variable and characteristics of the firm or the event serve as independent variables

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