Journal of Business Research xxx (xxxx) xxx–xxx

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Journal of Business Research

journal homepage: www.elsevier.com/locate/jbusres

A new event study method to forecast stock returns: The case of Facebook
⁎
Tiffany Hui-Kuang Yua, Kun-Huang Huarngb,
a
Feng Chia University, 100 Wenhua Road, Seatwen, Taichung, Taiwan
b
National Taipei University of Business, No. 100, Sec. 1, Fulong Rd., Pingzhen Dist, Taoyuan City 324, Taiwan

A R T I C LE I N FO A B S T R A C T

Keywords: This study proposes a new event study method to forecast abnormal returns for individual companies in order to
Abnormal returns overcome the limitations of current related approaches. We consider two criteria to determine whether there are
Facebook abnormal returns: individual stock performance and relative performance between an individual stock and the
Forecasting, thresholds market. We first use in-sample data of Facebook’s stock prices between 2017/1/1 and 2018/6/30 to build rules
and then employ those rules to forecast its out-of-sample data between 2018/7/1 and 2018/12/31. The em-
pirical analysis shows that our new method accurately forecasts 4 out of 5 negative CNN news items for
Facebook. The proposed new method contributes to the literature on case study methods by utilizing a new way
to define abnormal returns and to forecast events successfully.

1. Introduction
Event study methods examine certain occurrences that result in
abnormal returns (Li & Tallman, 2011) and have been used extensively
in the financial and economics literature. However, they typically just
confirm if an event has caused an abnormal change in stock prices or
excess returns of an affected company. This study thus proposes a new
event study approach that advances the analysis to the level of a fore-
cast, which can greatly enhance the resultant value of an event study.
The present literature uses abnormal returns (ARs), calculated based
on a stock’s expected return, to check if they are caused by any specific
event. The mean adjusted returns model utilizes the average of stock
returns over an estimation period to represent the expected return, but
it does not consider the relative performances of the individual stock
and the market. Conversely, the market model uses linear regression to
find the parameters for calculating the expected return. However, a
single linear regression may not be able to represent complicated stock
behaviors (Woodside, 2014), much less current methods that only are
able to pinpoint a single event.
This study therefore presents a new event study method that con-
siders two criteria for abnormal returns (and events). First, we take an
extremely high (or low) daily stock return as an abnormal return to
forecast events. Second, if the daily stock return does not reach the
above-mentioned level, then we use relative performance (i.e., ratio
between the daily stock return and the daily market return) to identify
the abnormal return. Hence, we are determining the thresholds for both
criteria.
To achieve better forecasting ability, this study separates the data
into in-sample and out-of-sample datasets. The former covers “known”
data, allowing us to determine the thresholds and to build rules during
the estimation period. We then use those rules to forecast the out-of-
sample data, which are “unknown”. The new method is able to forecast
multiple events during an event period.
Because the new method relies on “known” data to build the rules,
the selection of a target company becomes critical. In other words, we
need to find one that has enough events to facilitate our analysis. Social
media companies offer a good direction, because they recently have
been involved in a number of data breach occurrences. Among the
various social media companies, we pick Facebook as our study target
for a couple of reasons. First, Facebook is one of the largest social media
companies listed on NASDAQ, and second its data and relevant events
are publicly accessible.
The rest of the paper is organized as follows. Section 2 reviews the
applications of current event study methods. Section 3 introduces the
current methods, this study’s new method, and the data. Section 4
shows how to build rules from an estimation and then to utilize those
rules to forecast events in the out-of-sample data. Section 5 discusses
the empirical results. Section 6 summarizes this paper and provides
some directions for future research.
2. Literature review
The literature has applied event study methods to various domains
such as finance-related problems. Khalil, Mansi, Mazboudi, and Zhang

⁎
Corresponding author.
E-mail addresses: hkyu@mail.fcu.edu.tw (T.H.-K. Yu), khhuarng@ntub.edu.tw (K.-H. Huarng).

https://doi.org/10.1016/j.jbusres.2019.11.006
Received 7 June 2019; Received in revised form 1 November 2019; Accepted 4 November 2019
0148-2963/ © 2019 Elsevier Inc. All rights reserved.

Please cite this article as: Tiffany Hui-Kuang Yu and Kun-Huang Huarng, Journal of Business Research,
https://doi.org/10.1016/j.jbusres.2019.11.006
T.H.-K. Yu and K.-H. Huarng Journal of Business Research xxx (xxxx) xxx–xxx

(2019) take one such method to examine the effect of an exogenous

increase in information asymmetry on bond prices and find that
bondholders react negatively to a late filing announcement. Shi, Xu,
t1 t2 t3 event t4
and Zhang (2018) set up an event study to show that politically con-
nected independent directors destroy firm value based on an exogenous Estimation period Event period
regulatory change. Velásquez, Kanniainen, Mäkinen, and Valli (2018)
Fig. 1a. The time periods in the event study.
also use an event study to examine investor intra-day reactions to two
types of layoff announcements. Their statistical significant evidence
shows that investors have a strongly negative reaction to layoff nego- Davidson (2000) and Veraros, Kasimati, and Dawson (2004) con-
tiations within the first 10 min of stock transactions. However, other centrate on the effect of major sports events. King and Soule (2007)
strong evidence appears in which the first negative reaction reverses in apply event study analysis to test the effects of 342 protest events be-
aggregated cumulative abnormal returns during the subsequent hours. tween 1962 and 1990 on selected companies.
Carow and Kane (2002) and Howe and Jain (2004) utilize event
study methods to examine the effect of legislation on the wealth of 3. Event study methods
investors, while Henry (2000) and Jackson and Madura (2007) look at
the effects of regulations and liberalization on stock performance. 3.1. Current methods
Cooper, Dimitrov, and Rau (2001) study the effect of a company’s
change of name on its stock returns. Rapp, Schellong, Schmidt, and The event study literature aims to measure the effect of a certain
Wolff (2011) exploit an event study to investigate the application of event on the return of stocks. Thus, we first define an event study
value–based management systems in German listed firms and their ef- periods in Fig. 1a. We name the period between t1 and t2 as the esti-
fect on firms’ stock market performance. mation period and the period between t3 and t4 as the event period.
Chernin and Lahav (2014) show how certain important events ne- There are different ways to measure abnormality, which implies
gatively affect food retailers’ stock prices and also that a proper re- that stock prices are greatly affected by events. The first way is the
sponse to these events by retailers could prevent their stock from mean adjusted returns model, where the expected stock return in the
falling. Tischer and Hildebrandt (2014) conduct an event study to event period is equal to the average of the stock returns over the esti-
analyze the impact of the publication of reputation rankings by the mation period:
German Manager Magazine on stock prices. As expected, positive and t2
∑t = t1 Ri, t
negative announcement effects exist regarding upgraded or down- E(Ri ) = ,
t 2 − t1 (1)
graded companies, respectively. Fuenzalida, Mongrut, Arteaga, and
Erausquin (2013) explore if good corporate governance practices gen- where Ri,t = the return of stock i on day t, and E(Ri ) = the expected
erate positive returns on the Lima Stock Exchange (LSE) via an event return of stock i during the event period.
study. Their findings show that the announcement of a firm’s inclusion The second way is the market adjusted returns model, where the
in the LSE yields a positive abnormal return on the announcement day. expected return of a stock is equal to the market return. Studies con-
Furthermore, firms with good corporate governance practices outper- sider that an equal-weighted market index is better for conducting an
form firms with bad corporate governance practices. event study (Brown & Warner, 1980).
Current event study methods have also been directed toward in-
E(Ri ) = Rm , (2)
ternational business. Juasrikul, Sahaym, Yim, and Liu (2018) examine
value creation from cross-border alliances between emerging econo- where Rm = the market return of the event period.
mies and developed economies. Using an event study of 1096 cross- The third way is a market model, where the ordinary least square
border alliances from 1994 to 2013, they show how emerging econo- calculates the return of period t:
mies derive long-term value from such alliances. Extending into the role Ri, t = αi + βi Rm, t + εi, t , (3)
of directors’ within-firm characteristics, Chen and Lai (2015) in-
vestigate the impact of an interlocking directorate on the market value where Rm, t = the market return of day t, and εi, t = an error term that we
of international merger and acquisition (M&A) announcements. Via an assume to be independent and independently distributed.
event study, they highlight the importance of multiple directorships We hence calculate the expected return of the event period (t) as:
and their influence on investors’ assessments of corporate cross-border E (Ri, t )=αi′ + βi′ Rm, t , (4)
acquisition strategies. García-Canal and Sánchez-Lorda (2013) analyze
how policy hazards may affect stock market reactions to inter- where αi′ and βi′ = the model parameters to be estimated using daily
nationalization decisions made by telecommunication companies. They data from a period that ends before the event.
use an event study method to estimate the abnormal returns obtained For every day in the event period, we calculate a measure for stock
by firms expanding abroad and then run several multiple linear re- return abnormality as:
gression models so as to estimate the effects of policy risk and the mode ARi, t = Ri, t − E (Ri, t ), (5)
of entry chosen on these abnormal returns. Via an event study, Kiymaz
and Alon (2011) investigate M&A announcements’ impact on wealth where ARi,t = the abnormal return of company i on day t, Ri,t = the
gains for U.S. firms involved in cross-border acquisitions of Chinese actual return on stock i on day t, and E(Ri,t) = the expected return on
firms over the period from 1999 to 2007. Their empirical findings stock i on day t if the event had not occurred.
confirm that U.S. firms experience statistically significant wealth gains We now calculate the cumulative abnormal return (CAR(t3,t4),i) of
on announcement day. company i, the average abnormal return (AARt), and the average cu-
Current event study methods have also spread to other problems. mulative abnormal return (ACAR(t3,t4)) for the whole market respec-
For a case study, Fan, Lo, Yeung, and Cheng (2018) investigate a cor- tively as:
porate label change’s impacts on a firm’s long-term labor productivity t4
and find that such a change negatively affects long-term labor pro- CAR (t 3, t 4), i = ∑ ARi,t
ductivity. They further note that reputable and labor-intensive firms t=t3 (6)
suffer more from a corporate label change. Johnson, Kasznik, and M
Nelson (2000), Carow and Heron (2002), and Chen and Siems (2004) AAR t = M−1 ∑ ARi, t
examine the effect of terrorism via an event study. Berman, Brooks, and i=1 (7)

2
T.H.-K. Yu and K.-H. Huarng Journal of Business Research xxx (xxxx) xxx–xxx

M
ELSE IF Rt ′ ≤ τ2 THEN there is no event
ACAR (t 3, t 4) = M−1 ∑ CAR (t 3, t 4), i , ELSE IF τ1 > Rt ′ > τ2 THEN GO TO RULE 2
i=1 (8)
where M = the number of stocks, t3 = the starting day of the event If an event is conversely negative, then its associated Rt becomes a
period, and t4 = the ending day of the event period. negative threshold candidate, θt . When there are multiple negative
We next employ CAR(t3,t4),i to estimate the t-statistic that tests the threshold candidates, we choose the maximal one:
significance of the cumulative abnormal return within the event period
n
as:
τ3 = ∑ θt
CAR (t 3, t 4), i t=1
tCAR(t3, t 4), i = .
S Tp (9)
where τ3 = the threshold for a negative event, Σ = a maximal function,
The above methods may have various limitations. The mean ad- and n = the total number of negative threshold candidates.
justed returns model uses the average of the stock return over the es- We now have to find the smallest Rt that is larger than τ3, named τ4 .
timation period to represent the expected return, but this expected re- From the in-sample data, there is no negative event associated with Rt if
turn does not consider the relative performances of the stock and the Rt is larger than τ4 . If Rt falls between τ3 and τ4 , then similarly we need
market. The market adjusted returns model takes the market return as the another rule to determine the result. Thus, we derive RULE 1b as
the expected return of a stock, and because it only considers the market, follows.
it sacrifices the return of an individual stock. The market model em-
ploys linear regression to find the parameters for calculating the ex- RULE 1b (for an individual stock with a negative event)
pected return, but a single linear regression may not be able to re- IF Rt ≤ τ3 THEN there is a negative event
present complicated stock behaviors. ELSE IF Rt ≥ τ4 THEN there is no event
ELSE IF τ4 > Rt > τ3 THEN GO TO RULE 2
3.2. New method
In summation, if there exists an abnormal return, then Rt must be
This study proposes a new method to forecast how the stock price of larger (or smaller) than a threshold. If there is a positive event, then Rt
a company reacts to events. With this new method, Fig. 1b shows that is positive and larger than a positive threshold. On the contrary, Rt is
there can be multiple events during the event period. To ascertain that negative and smaller than a negative threshold. The threshold is subject
there is an abnormal return for an individual stock due to a certain to change for different companies.
event, this study proposes two criteria. The first criterion relates to an The second criterion relates to the relative performance of the in-
individual stock’s performance, which is its daily stock return (Siddikee, dividual stock against the market. It provides further analysis to de-
2018): termine if any event has occurred. We define the relative performance
St − St − 1 as follows:
Rt = ,
St − 1 (10)
Rt
RRt = ,
where St and St − 1represent stock prices at t and t −1, respectively. MRt (11)
When an individual stock price rises extremely high or drops ex-
tremely low, we denote the stock as exhibiting an abnormal return. In where
other words, the first criterion ensures that the stock price has risen (or
fallen) to a significant level. Thus, we need to determine a threshold MSt − MSt − 1
MRt = .
from the in-sample data for extremely high or low. MSt − 1 (12)
We start with the events from the in-sample data. If an event is
positive, then its associated Rt becomes a positive threshold candidate, Here, MSt andMSt − 1 = the market index at t and t-1, respectively.
θt . When there are multiple positive threshold candidates, we choose When RRt is negative and smaller than a threshold, τ5 , it means that
the minimal one: the stock price of the individual company and the market index go in
different directions: one is positive and the other is negative, and vice
m
versa. In other words, the returns of the individual stock and the market
τ1 = ∏ θt ,
t=1 are considered independent.
When RRt is positive, it means that the stock price of the individual
where τ1 = the threshold for a positive event, Π = a minimal function,
company and the market index move in the same direction: both are
and m = the total number of positive threshold candidates.
positive or negative at the same time. In this case, we need to exclude
We next need to find the largest Rt that is smaller than τ1, which we
the cases when the market factor affects the change in the stock prices.
name τ2 . From the in-sample data, there is no positive event associated
Hence, only when RRt is significantly large do we consider that both are
with Rt if Rt is smaller than or equal to τ2 . If Rt falls between τ1 and τ2 ,
independent of each other. Again, we utilize a threshold, τ6 , to distin-
then we need another rule to determine the result. Thus, we derive
guish the relationship.
RULE 1a as follows.
RULE 2
RULE 1a (for an individual stock with a positive event)
IF RRt < τ5 OR RRt ≥ τ6 THEN
IF Rt ′ ≥ τ1 THEN there is a positive event
IF greater than 0Rt THEN there is a positive event
ELSE there is a negative event
ELSE there is no event

We obtain τ1 ~ τ6 from the in-sample data. The events are defined by

t1 t2 t3 events t4 news. We next check to see if there is any abnormal return either 7 days
prior to or 7 days after the date that a piece of news was reported by
Estimation period Event period
CNN.
Fig. 1b. Multiple events in the event period.

3
T.H.-K. Yu and K.-H. Huarng Journal of Business Research xxx (xxxx) xxx–xxx

3.3. Data Table 2

Rt , MRt , and RRt from the in-sample data.
To demonstrate how the new method works, we target to find a Date St Rt MSt MRt RRt
company with numerous news events. This study picks Facebook as our
study target for a few reasons. It receives a lot of media coverage, in- 2018/3/19 172.56 −6.77% 7344.24 −1.84% 367.70%
2018/3/27 152.22 −4.90% 7008.81 −2.93% 167.04%
cluding controversies such as user privacy, user addiction, etc.
Facebook is also a listed company with publicly available data and is
also one of the largest social media companies in the world. Hence, its
Table 3
relevant events are very open to the public.
Rt , MRt , and RRt from the out-of-sample data.
This study uses the closing prices of Facebook (target company) and
closing levels of NASDAQ (market) as the data for analysis. The in- Case Date St Rt . MSt MRt RRt
sample data cover between 2017/1/1 and 2018/6/30 (3/4 of all the
1 2018/7/26 176.26 −18.96% 7852.18 −1.01% 1878.62%
data), while the out-of-sample data are those between 2018/7/1 and 2 2018/10/24 146.04 −5.41% 7108.4 −4.43% 122.21%
2018/12/31 (1/4 of all the data). 3 2018/11/19 131.55 −5.72% 7028.48 −3.03% 188.94%
To validate the analysis, this study defines “event” as news ap- 4 2018/12/19 133.24 −7.25% 6636.83 −2.17% 334.55%
5 2018/12/21 124.95 −6.33% 6332.99 −2.99% 211.61%
pearing on Cable News Network (CNN). As of September 2018, it has
more than 90 million television households as subscribers. We need to
judge if the characteristic of the news is either positive, neutral, or
sample data for τ5.Hence, we build RULE 2 as follows.
negative. Facebook has recently suffered from data breach events, and
so we might be able to tell whether the related news is negative to its
RULE 2
stock price.
IF RRt ≥ 167.04% THEN
IF > 0Rt THEN there is a positive event
4. Empirical analysis
ELSE there is a negative event
ELSE there is no event
4.1. CNN news

To validate the empirical analysis, this study uses CNN online news
(www.cnn.com). The keywords are “Facebook” and “privacy” under the
website’s Business category. Table 1 lists the news related to Facebook’s
stock performance. The first column shows the dates of the news, which
is important to validate the event period. The second column lists the
titles of the news. For example, on July 27, 2018, there was news
stating that Facebook stock had its worst day ever.
4.2. Estimation
For estimation we first calculate Rt , MRt , and RRt for all in-sample
data. Here, we find only one piece of negative news related to Facebook
in the in-sample period on 2018/3/19, as shown in Table 2; its Rt is
−6.77%. Hence, we conclude that Rt , because it is smaller than or
equal to −6.77%, was caused by an event. In other words,
τ3 = −6.77%. The next value close to −6.77% is −4.90%, which was
on 2018/3/27, but there was no news around March 27. Hence,
τ4 = −4.90%. We conclude that Rt with a value larger than −4.90% is
not associated with any event. Table 2 lists the data, and so we derive
RULE 1b as follows.
RULE 1b
IF Rt ≤ −6.77%, THEN there is a negative event.
ELSE IF Rt ≥ −4.90%, THEN there is no event.
ELSE IF −4.90% > Rt > −6.77%, THEN GO TO RULE 2
Because there was no positive news for Facebook from CNN, there is
no threshold for RULE 1a from the in-sample data.
For RULE 2, RRt of 2018/3/27 (the only negative news in the es-
timation period) is equal to 167.04% (τ6 ). Moreover, there are no in-
Table 1
Facebook news appearing on CNN online news website.
2018/3/19 Why nobody can tell Mark Zuckerberg what to do at Facebook
2018/7/27 Facebook stock had its worst day ever
2018/10/31 Big Tech’s next European nightmare: A tax on revenues
2018/11/19 Dow closes down 396 points as Facebook, Apple stocks fall
2018/12/15 Facebook could face billion dollar fine for data breaches
2018/12/19 NYT: Facebook offered big tech firms more user data than
previously revealed
4.3. Forecasting
Following Table 3, there are 5 pieces of news related to Facebook on
2018/7/26, 2018/10/24, 2018/11/19, 2018/12/19, and 2018/12/21.
We calculate Rt , MRt , and RRt for all out-of-sample data. Following the
rules obtained from estimation, we first list all out-of-sample data with
Rt less than −4.90% in Table 3. When we check against RULE 1b, both
Cases 1 and 4 have Rt ′s less than −6.77%. Both match RULE 1b. Hence,
we conclude that both correspond to negative events that pair up with
CNN news.
Second, Cases 3 and 5 both have Rt ’s that fall between −4.90% and
−6.77%. Thus, we move further to check against RULE 2; the RRt ’s of
both these two cases are greater than 167.04%. Both match RULE 2.
Hence, we conclude that they match negative events that again corre-
spond to CNN news.
We lastly check Case 2 (whose Rt is −5.41%) on 2018/10/24. We
move to RULE 2. Its RRt = 122.21%, or less than 167.04%. We con-
clude that there is no event associated with that date, but CNN did have
negative news on 2018/10/31, which was one week after. We consider
this a so-called misfire. Overall, the forecasting correctness rate is 4/
5 = 80%.
5. Discussion
The contribution of event study methods is to particularly forecast
the rise or fall of stock prices due to certain events. Our event study
method uses events (news) during the estimation period and the in-
sample data to determine the thresholds and to build the rules based on
the thresholds. We then use the rules to forecast the multiple events in
the event period.
Rule 1 aims to check if Rt is greater than the positive thresholds or
lower than the negative thresholds. For example, the Rt ’s of Cases 1 and
4 are lower than the thresholds, meaning both have extremely negative
returns. By Rule 1b, we can proceed to claim that both relate to ne-
gative events.
Rule 2 picks up possible events when Rt is not extremely high or
low. It checks for relative performance. As an example, the Rt ’s of cases
3 and 5 are not extremely low, and so we move to Rule 2. Because both
RRt ’s are higher than the threshold for relative performance and both
have negative Rt ’s, we can claim that both match negative events.

4
T.H.-K. Yu and K.-H. Huarng
Our new method is different from current methods in the literature
in many perspectives. First, the new method uses daily stock return and
relative performance as the criteria. Second, the new method uses in-
sample data to obtain the thresholds and to build the rules. Third, the
rules obtained from estimation are then used for forecasting. Next, the
rules are very company dependent, as we need to calculate Rt , MRt , and
RRt for each company. Lastly, the new method can forecast multiple
events.
6. Conclusion and future study
It is very interesting and beneficial to know if the stock price of an
individual company correlates to any events. This study proposes a new
approach to overcome the limitations of current event study methods in
the literature by separating the data into groups of in-sample and out-
of-sample. In-sample data help build the rules in the estimation period.
These rules then allow us to forecast the out-of-sample data in the event
period. This study takes Facebook as the study target, because it is a
leading company in the social media industry and its related data and
news are relatively easy to access. The empirical analysis shows that the
new method successfully forecasts the events.
The rules built by the new method are company dependent, and
thus each company has to build its own rules. Thresholds can be con-
sidered as the abnormal returns. Furthermore, the new method can also
forecast multiple events during the forecasting period and is different
from current methods. First, it uses daily stock return and relative
performance as the criteria. Second, it employs in-sample data to obtain
the thresholds and to build the rules. The rules obtained from estima-
tion are very company dependent and can be used for forecasting. In
addition, the new method can forecast multiple events.
Future studies should be able to apply the new event study method
to other listed companies for further validation. Additional analysis can
also be conducted based on companies from different industries in order
to examine for any variances when applying the new method.
Funding
This work was supported by the Ministry of Science and Technology
[MOST 107-2410-H-141-014-], Taiwan, ROC.
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Tiffany Hui-Kuang Yu is a Professor of Public Finance at Feng Chia University, Taiwan
and a Project Investigator of NISA Project Office, Ministry of Education, Taiwan. She
served as the Director of Science and Technology Division Taipei Economic and Cultural
Office in Houston during 2015-2019. She had her Ph.D. from Texas A&M University, USA.
Her research interests include big data analytics, artificial intelligence, and public fi-
nance.
Kun-Huang Huarng is a Vice President, a Distinguished Professor, a Professor of Product
Innovation & Entrepreneurship, National Taipei University of Business, Taiwan. His re-
search interests cover structured qualitative analysis, big data analytics, and electronic
commerce.