33.12 Heterogeneity in the Event Effect

The impact of an event on stock performance can vary significantly across firms due to firm-specific or event-specific characteristics. We model this heterogeneity using the following regression framework:

$$y = X \theta + \eta$$

where:

• $y$ = Cumulative Abnormal Return (CAR) for a given event window.
• $X$ = Matrix of firm- or event-specific characteristics that explain heterogeneity in the event effect.
• $\theta$ = Vector of coefficients capturing the impact of these characteristics on abnormal returns.
• $\eta$ = Error term, capturing unobserved factors.

Selection bias can arise if firm characteristics influence both the likelihood of experiencing the event and the magnitude of abnormal returns. One common issue is investor anticipation:

• Example: Larger firms might benefit more from an event, leading investors to preemptively price in the expected effect, potentially distorting CAR measurements.

• This can result in an endogeneity problem, where expected returns are systematically related to firm characteristics.

To correct for this issue, White’s heteroskedasticity-consistent $t$-statistics should be used. This provides lower bounds for the true significance of coefficient estimates by accounting for heteroskedasticity in the regression residuals.

Key Point: Even if the average CAR is not significantly different from zero, analyzing heterogeneity remains essential, particularly when CAR variance is high (Boyd, Chandy, and Cunha Jr 2010).

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33.12.1 Common Variables Affecting CAR in Marketing and Finance

Event effects on stock returns can be influenced by various firm-specific and market-specific factors. The following variables are commonly examined in event studies, as summarized in A. Sorescu, Warren, and Ertekin (2017) (Table 4).

Firm-Specific Characteristics

1. Firm Size
   • Finance Literature: Typically negatively correlated with abnormal returns.
   • Marketing Literature: Results are mixed, suggesting different dynamics.
   • Interpretation: Large firms may have less information asymmetry, leading to smaller stock reactions.
2. Number of Event Occurrences
   • A firm that frequently experiences similar events may see diminishing stock market reactions over time.
3. R&D Expenditure
   • Higher R&D investment often signals long-term innovation potential but may also increase risk, affecting abnormal returns.
4. Advertising Expense
   • Can enhance brand equity and consumer perception, leading to a stronger stock price response to events.
5. Marketing Investment (SG&A - Selling, General & Administrative Expenses)
   • A proxy for strategic spending on market development.
   • High marketing investment may drive higher abnormal returns if perceived as value-enhancing.
6. Financial Leverage (Debt-to-Equity Ratio)
   • High leverage can amplify risk, leading to more pronounced market reactions to events.
7. Book-to-Market Ratio
   • A fundamental indicator of valuation.
   • High book-to-market firms (value stocks) may respond differently to events compared to low book-to-market firms (growth stocks).
8. Return on Assets (ROA)
   • A measure of firm profitability.
   • Higher ROA firms may be less susceptible to negative shocks.
9. Free Cash Flow
   • High free cash flow can signal financial flexibility, potentially mitigating negative event impacts.
10. Sales Growth
    • A proxy for firm momentum.
    • Higher growth firms may exhibit stronger abnormal returns following positive events.
11. Firm Age
    • Younger firms may experience higher abnormal returns due to greater investor uncertainty and information asymmetry.

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Industry-Specific & Market-Level Characteristics

12. Industry Concentration (Herfindahl-Hirschman Index - HHI, Number of Competitors)
    • High industry concentration (fewer competitors) can reduce competitive pressure, leading to stronger abnormal returns.
13. Market Share
    • Firms with higher market share may experience weaker abnormal returns due to already-established dominance.
14. Market Size (Total Sales Volume within the Firm’s SIC Code)
    • A measure of industry attractiveness.
    • Events occurring in larger markets may have muted effects due to broader investor diversification.
15. Marketing Capability
    • Firms with stronger marketing capabilities may better leverage events for long-term brand and revenue growth, influencing CAR.

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References

Boyd, D Eric, Rajesh K Chandy, and Marcus Cunha Jr. 2010. “When Do Chief Marketing Officers Affect Firm Value? A Customer Power Explanation.” Journal of Marketing Research 47 (6): 1162–76.

Sorescu, Alina, Nooshin L Warren, and Larisa Ertekin. 2017. “Event Study Methodology in the Marketing Literature: An Overview.” Journal of the Academy of Marketing Science 45: 186–207.