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93 Wash. U. L. Rev. 583 (2015-2016)
Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias

handle is hein.journals/walq93 and id is 597 raw text is: EVENT STUDIES IN SECURITIES LITIGATION: LOW POWER, CONFOUNDING EFFECTS, AND BIAS ALON BRAV* J.B. HEATON** ABSTRACT An event study is a statistical method for determining whether some event-such as the announcement of earnings or the announcement of a proposed merger is associated with a statistically significant change in the price of a company's stock. The main inputs to an event study are historical stock returns for the companies under study, benchmark returns like the return to the broader stock market, and standard statistical tests like t-tests that are used to test for statistical significance. In securities litigation and regulation, event studies are used primarily to detect the impact of disclosures of alleged fraud on the price of a single traded security. But are event studies in securities litigation reliable? What is interesting about the use of event studies in securities litigation is that the methodology litigants use in court differs from the methodology that economists apply in their research. With few exceptions, securities litigation event studies are single-firm event studies, while almost all academic research event studies are multi-firm event studies. Multi-firm event studies are generally accepted in financial economics research, and peer-reviewed journals contain them by the hundreds. By contrast, single- firm event studies the mainstay of modern securitiesfraud litigation are almost nonexistent in peer-reviewed journals. * Robert L. Dickens Professor, Duke University Fuqua School of Business and National Bureau of Economic Research. brav@duke.edu. ** Partner, Bartlit Beck Herman Palenchar & Scott LLP. jb.heaton@bartlit-beck.com. The views expressed here are Heaton's own, and do not express the views of Bartlit Beck Herman Palenchar & Scott LLP, its attorneys, or its clients. For very helpful comments and suggestions, we thank Josh Ackerman, Reid Bolton, Peter Clayburgh, Brad Cornell, Chris Culp, Kevin Dages, Tiago Duarte-Silva, Marc Gross, Chris Hagale, Jeff Hall, Mike Keable, Ashley Keller, Chris Landgraff, Dan McElroy, Katherine Minarik, Mark Mitchell, Steve Nachtwey, Martha Pacold, David Ross, Cindy Sobel, David Tabak, Sanjay Unni, David Wensel, and participants at the 21st Annual Institute for Law and Economic Policy Conference: New Directions for Corporate and Securities Litigation (co-sponsored by the Washington University Law Review and the Institute for Law and Economic Policy). We are especially grateful to Jim Cox for inviting us to think hard about single-firm event studies. All errors are our own.