28.4 Biases

  • Different closing time obscure estimation of the abnormal returns, check (Campbell et al. 1998)

  • Upward bias in aggregating CAR + transaction prices (bid and ask)

  • Cross-sectional dependence in the returns bias the standard deviation estimates downward, which inflates the test statistics when events share common dates (MacKinlay 1997). Hence, (Jaffe 1974) Calendar-time Portfolio Abnormal Returns (CTARs) should be used to correct for this bias.

  • (Wiles, Morgan, and Rego 2012): For events confined to relatively few industries, cross-sectional dependence in the returns can bias the SD estimate downward, inflating the associated test statistics” (p. 47). To control for potential cross-sectional correlation in the abnormal returns, you can use time-series standard deviation test statistic (S. J. Brown and Warner 1980)

  • Sample selection bias (self-selection of firms into the event treatment) similar to omitted variable bias where the omitted variable is the private info that leads a firm to take the action.


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