Determining the impact of an event on share prices using the event study

Event study helps to determine the effect of an event on a dependent variable. In most cases, an event study is used to determine the impact of an event on the stock prices of a company. The main motive of the event study is to find whether the event has abnormal returns on the prices of the stock. In other words, whether the prices would have changed if the event has not taken place. To conduct the event study following steps can be followed:

Step 1: Selection of event

For any event study, selection of the event is the first and most important thing.  The researcher can choose event such as:

  • the merger and acquisition,
  • announcement of dividend,
  • retirement of the chairman or,
  • any other event associated with the company which is selected for the study.

It is important to note that the event should have a particular announcement date.

Step 2: Selection of event window for event study

After the selection of the event and the announcement date of the event, the next is to select the event window. The event window is the time period for which the expected return and the abnormal return will be calculated. For example if when selected the merger and acquisition of a company with the event and the date of official announcement on 15th January. We can select the event window 30 days before 30 days after 15th January or 60 days before and after the announcement date. The event window will vary according to the selection of the window. There is not any particular formula for selection of event window however a minimum of 20 days before and after the announcement date can give some useful information.

Step 3: Calculation of the return

The return on the share prices of the company is selected for the study and the market return in which the shares of the selected companies are traded.

Return on the share price of the selected company

Since we want to see the impact of some particular event on the share prices of a particular company, the next step is to calculate the return on the share prices.  One can use the following formula to calculate the return on share prices :

Calculating return on share prices for event study.

Calculating the return on share prices (Source: Khotari & Warner, 2006)


Rit is the return of company “i” in the time period “t”, Pit is the closing share price in time period t and Pt-1 is the closing share price in the time period “t-1″.

Market return

To calculate the expected return the data for the market return is necessary. The market return for the study will depend on the company selected for the study.

For example, while choosing the companies from Nifty 50, the return on the Nifty Fifty index is chosen.

The formula for the market return is similar to the formula of return on share prices. The only difference will be that instead of the closing share price, the closing price of the index is chosen.

Step 4: Calculation of the expected return

Event study helps to examine a significant difference between the expected return of the share prices and the actual return of the share prices. Calculation of actual return is shown in (step 3). The expected return of the share price can be calculated by regression with the following   equation:

Expected return with regression equation

Expected return with regression equation (Source: Khotari & Warner, 2006)


E(Rit) is the expected return on the share price.

Rmt is market return at the time period t.

Expected return can be calculated in Microsoft Excel with the following formula:

Expected Return = intercept + (slope * market return) 


  • Slope:- slope (return of the company, the return of market)
  • Intercept:- intercept ( return of the company, the return of market)

Step 5: Calculation of abnormal return

The abnormal return is the difference between the actual return and the market return. It is calculated as:

Abnormal Return = Actual Return – Expected Return

Step 6: Average abnormal return

To calculate the average daily abnormal return for the study period (event window) by calculating the arithmetic mean of the abnormal return.

Average abnormal return (AAR)

Average abnormal return (AAR) (Source: Khotari & Warner, 2006)


ARit is the abnormal return of firm ‘i” at time period “t”.

Step 7: Cumulative average abnormal return

The cumulative average abnormal return for the study period is calculated as follows:

Cumulative average abnormal return (CAARk)

Cumulative average abnormal return (CAARk) (Source: Khotari & Warner, 2006)


AARit is the average abnormal return of firm “i” at time period “t”.

Step 8: Conducting the t-test

The last and the final step of the event study is to test whether the event leads to an abnormal return in the share prices or not using the t-test.

The t-test is performed as follows:

AAR/ standard error (Source : Khotari & Warner, 2006)

Where standard error is calculated in Excel using the following formula;

Standard Error = STEYX (return on company share, return on market) 

Now, if the average abnormal return is significantly different from 0, then we can conclude that the event has a significant impact on the share prices of the company which leads to abnormal return. On the other hand, if the average abnormal return is not significantly different from 0 then the event does not have a significant impact on the share prices of the company.


Indra Giri

Indra Giri

Senior Analyst at Project Guru
He completed his Masters in Development Economics from South Asian University, New Delhi. His areas of interest includes various socio development issues like poverty, inequality and unemployment in South Asia. Apart from writing for Project Guru he loves to travel and play football in his spare time.
Indra Giri

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  1. Sir,
    How to calculate the standard deviation for the period(-5,-4),(-5,-3)(-5,-2)(-5,-1)(-5,-0)(-5,-1) and so on when cumulative Average Abnormal return(CAAR)/standard deviations is the statistical test
    Period AAR period CAAR Std devi
    -5 .40 (-5,-5) .40 ???
    -4 .77 (-5,-4) 1.16 ???
    -3 .81 (-5,-3) 1.97
    -2 -.18 (-5,-2) 1.80
    -1 .11 (-5,-1) 1.91
    -0 .27 (-5,0) 2.17
    1 -.30 (-5,1) 1.87
    2 -.78 (-5,2) 1.09
    3 -.93 (-5,3) 2.02
    4 .63 (-5,4) 2.64
    5 -.16 (-5,5) 2.48

  2. sir
    while calculating the slope and intercept should i leave the event period that is if the event period is 41 window then while calculating the slope should i leave the pre 20 days from the calculation of slope?

  3. Himanshu shrivastava

    The article is very helpful… How to get the beta and alpha values for for the window period. I am conducting research on the same ,kindly suggest.

  4. Function s there in Excel. It’s there in YouTube video also how to calculate AR market model. Intercept(ri) ri is d firm returns. Slope(ri). Beta and alpha.

  5. Hi,

    When calculating the return of the share you consider the return to be the difference in closing prices between T and T-1, divided by the closing price at T-1.

    Instead of using the closing price at T-1, is it not more appropriate to use the opening price at T?

    Given that the opening price is a better reflection of the starting price on day T, due to the possibility of price fluctuations between the markets closing (closing price at T-1) and the markets opening (opening price at T).


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