CMA Final · Strategic Financial Management · Efficient Market Hypothesis
An event study of 5 companies records the following abnormal returns on the announcement day (day 0) of a bonus issue: +2.0%, +1.0%, -0.5%, +3.0%, +0.5%. On day +1 the average abnormal return across the same companies is +0.2%. What are the average abnormal return on day 0 and the cumulative average abnormal return (CAAR) from day 0 to day +1?
The average abnormal return on day 0 is 1.2%, since the five abnormal returns total 6.0% and are divided by five. Adding the day +1 average of 0.2% gives a cumulative average abnormal return of 1.4% over the two days.
- A1.2% and 1.4%Correct
- B1.2% and 1.2%
- C6.0% and 6.2%
- D1.0% and 1.2%
Explanation
Sum on day 0 = 2.0+1.0-0.5+3.0+0.5 = 6.0%. Average = 6.0/5 = 1.2%. CAAR = 1.2% + 0.2% = 1.4%. Option with 6.0% is a total, not an average; ignoring day +1 gives 1.2% as CAAR.
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