Firm Characteristics and Long-run Stock Returns after Corporate Events

*


Hendrik Bessembinder
David Eccles School of Business
University of Utah
1655 E. Campus Center Drive
Salt Lake City, UT 84112
finhb@business.utah.edu
Tel: 801-581-8268

Feng Zhang
David Eccles School of Business
University of Utah
1655 E. Campus Center Drive
Salt Lake City, UT 84112
feng.zhang@business.utah.edu
Tel: 801-587-9476


This Version: May 2012

Abstract

The frequently-documented negative abnormal long run buy-and-hold returns to bidding firms,
SEO firms, and IPO firms can be attributed to imperfect control-firm matching. Control firms
are most often selected on the basis of firm size and market-to-book ratios. However, event
firms differ from control firms in terms of idiosyncratic volatility, illiquidity, beta, and return
momentum, each of which is also known to be related to returns. We propose a simple
regression-based approach to control for differences between event and control firms in
characteristics other than those used to match, and show that long run abnormal returns do not
differ significantly from zero for bidding firms, SEO firms or IPO firms in the 1980 to 2005
period. Our method also reconciles results of studies relying on time series factor model
regressions with those focusing on abnormal buy-and-hold returns.

Keywords: firm characteristics, long-run stock returns, BHARs, calendar-time portfolio, wealth
relative, event study
JEL classification: G34





Firm Characteristics and Long-run Stock Returns after Corporate Events


Abstract

The frequently-documented negative abnormal long run buy-and-hold returns to bidding firms,
SEO firms, and IPO firms can be attributed to imperfect control-firm matching. Control firms
are most often selected on the basis of firm size and market-to-book ratios. However, event
firms differ from control firms in terms of idiosyncratic volatility, illiquidity, beta, and return
momentum, each of which is also known to be related to returns. We propose a simple
regression-based approach to control for differences between event and control firms in
characteristics other than those used to match, and show that long run abnormal returns do not
differ significantly from zero for bidding firms, SEO firms or IPO firms in the 1980 to 2005
period. Our method also reconciles results of studies relying on time series factor model
regressions with those focusing on abnormal buy-and-hold returns.

Keywords: idiosyncratic volatility, liquidity, long-run stock return, BHAR, wealth relative, event
study
JEL classification: G34





1
Firm Characteristics and Long-Run Stock Returns after Corporate Events

Two approaches have commonly been employed to measure long-run abnormal stock
returns after corporate events. The first approach is based on buy-and-hold abnormal returns
(BHARs), which are assessed as the difference between long run buy-and-hold returns to event
firms compared to control firms that are matched to event firms based on firm characteristics
such as size and book-to-market ratio (B/M). The second, calendar time portfolio, approach
focuses on mean time series returns to a portfolio of event firms, after adjusting for portfolio
exposure to various risk factors.
The two approaches produce contrasting results in many studies. For example, Betton,
Eckbo, and Thorburn (2008) study bidding firms in mergers and acquisitions (M&A), and report
statistically significant five-year BHARs of -21.9% during the 1980 to2003 period, but also
report an economically small (0.08% per month) and statistically insignificant alpha (intercept
in the regression of calendar portfolio returns on risk factors) estimate for the same firms. Eckbo,
Masulis, and Norli (2008) study industrial firms that issued secondary (SEO) and initial (IPO)
offerings of common stocks during the 1980 to 2000 period and report significant five-year
BHARs of -29.7% and -18.0%, respectively. In contrast, the estimated alphas are for -0.18%
and -0.16%, respectively, and neither is statistically significant. Table 1 provides a summary of
results reported in several additional studies of returns to bidders and to firms issuing common
stock.
1

There are at least three possible reasons for the discrepancy in results across the two
methods. First, the risk factors used to adjust calendar time portfolio returns may be imperfect,

1
See Fama (1998), Loughran and Ritter (2000), Betton, Eckbo, and Thorburn (2008), and Eckbo, Masulis, and Norli
(2008) for additional discussion of the contrasting results.


2
which is the bad-model problem identified by Fama (1998). Second, returns to equal-
weighted portfolios and coefficient estimated in OLS return regressions are biased due to noise
in security prices, while buy-and-hold returns are largely free of such bias.
2
Third, while
matching firms are typically selected on the basis of firm characteristics known to be related to
average stock returns, it is typically not practical to match firms based on more than two or three
characteristics. The literature has identified numerous characteristics capable of explaining
variation in average stock returns, leaving open the possibility that the matched firms
systematically differ in non-matched characteristics that also affect returns. Further, firm
characteristics may change after corporate events, implying that pairs of firms that are well-
matched in terms of selected characteristics at a point in time may not remain so.
In this study, we assess whether the conflicting results obtained in studies of long run
abnormal returns obtained across the matched-firm versus time-series portfolio methods can be
explained on the basis of imperfect matching. We study long-run returns to bidding firms in
mergers and acquisitions (M&As), to firms that issue seasoned equity (SEOs), and to firms
making initial public offerings (IPOs) of common stock. The matched firm approach is most
often implemented on the basis of firm size and book-to-market ratio. However, we show that
event firms differ significantly from their size- and B/M-matched counterparts in terms of
idiosyncratic volatility, illiquidity, market beta, and return momentum.
3
In particular, bidding
firms, SEO firms and IPO firms all typically have significantly greater idiosyncratic volatility

2
Lyon, Barber, and Tsai (1999) note that buy-and-hold returns avoid the upward bias that exists in rebalanced (e.g.
equal-weighted) portfolio returns. Such bias was first emphasized by Blume and Stambaugh (1983). Asparouhova,
Bessembinder, and Kalcheva (2012) show that the bias extends also to coefficients estimated in OLS regressions
with security or portfolio returns as the dependent variable.
3
Idiosyncratic volatility is computed as the annualized standard deviation of the residual stock returns in the Fama-
French three factor regression, as in Ang, Hodrick, Xing, and Zhang (2006). Illiquidity is computed as the average
of the daily ratio of absolute stock return to dollar trading volume, as in Amihud (2002). Momentum is measured by
the cumulative return from 12 months to 2 months before the match date, as in Jegadeesh and Titman (1993). We
skip one month before the match date when calculating momentum to avoid the short-term reversal documented by
Jegadeesh (1990).


3
than their matching firms. All three types of event firms (M&As, SEOs, and IPOs) are
significantly less illiquid than their matching firm, and all three types are characterized by higher
market betas than their matching firms, while both SEO and M&A merger firms have
significantly higher momentum than their size and B/M matched counterparts.
Differences in idiosyncratic volatility, illiquidity, market beta, and momentum across
event firms and their matched counterparts potentially affect BHARs. Ang, Hodrick, Xing, and
Zhang (2006) among others show that idiosyncratic volatility is negatively associated with
expected stock returns.
4
Amihud and Mendelson (1986), Amihud (2002), and Pstor and
Stambaugh (2003), among others, find that both measures of illiquidity and systematic illiquidity
risk are priced in the cross-section of stock returns.
5
Numerous studies, commencing with
Jegadeesh and Titman (1993), have documented that firms with relatively high recent returns
tend to continue earning high returns in the intermediate term.
These results imply that matching event and control firms on the basis of firm size and
B/M may not provide a complete control for differences in average returns that are unrelated to
the event being studied, i.e. that the matched firms may not provide an appropriate benchmark to
assess the event firms performance. Consistent with this reasoning, when we divide sample
event firms into quintiles based on differences in idiosyncratic volatility and illiquidity between
event firms and matching firms over the 12 months before M&As and SEOs or over the 12
months after IPOs, we observe that BHARs significantly decrease with the difference in
idiosyncratic volatility and increase with the difference in illiquidity.

4
Fu (2009), in contrast, finds that expected idiosyncratic volatility is positively associated with expected stock
returns. Fu (2009) and Ang, Hodrick, Xing, and Zhang (2006, 2009) imply return premia with opposite signs. See
the following research for more evidence on the relation between idiosyncratic volatility and stock returns: Bali and
Cakici (2008), Guo and Savickas (2008), Huang, Liu, Rhee, and Zhang (2010), and Jiang, Xu, and Yao (2009).
5
See Amihud, Mendelson, and Pedersen (2005) for summaries of the literature on illiquidity and stock returns.


4
In light of the evidence that firm size and B/M ratio matching is only partially successful
in allowing for differences in mean returns across event and matched firms, and since matching
on a large number of firm characteristics is likely to be impractical, we propose a simple new
approach to measuring abnormal returns after corporate events. In particular, we propose to
assess abnormal returns as the intercept obtained when regressing differences in monthly log
returns across matched and control stocks on standardized differences in relevant firm
characteristics, including idiosyncratic volatility, illiquidity, momentum, and market beta.
A substantial prior literature has focused on statistical issues that arise when testing
whether long run BHARs differ from zero.
6
Lyon, Barber, and Tsai (1999) note that the matched
firm approach, where buy-and-hold returns to event firms are compared to returns on size and
B/M matched control firms, yields test statistics that are well-behaved in random samples.
These apparently well-behaved test statistics indicate significantly negative long run abnormal
returns to bidding firms, IPO firms, and SEO firms (though the latter only on a value-weighted
basis). We contribute to this literature from a new angle, by investigating whether additional
firm characteristics, including idiosyncratic volatility, illiquidity, and momentum, are able to
explain observed BHARs. We show that the proposed regression approach that allows for
differences in firm characteristics across event and control firms can fully explain observed
BHARs when studying M&A, IPO, and SEO events. The method therefore substantially
reconciles the conflicting evidence in the literature obtained from BHAR versus time series
portfolio return methods.
7


6
See Fama (1998), Brav (2000), and Kothari and Warner (2007) for summaries of this literature. For details of the
statistical issues and suggested solutions, see Barber and Lyon (1997), Kothari and Warner (1997), Lyon, Barber,
and Tsai (1999), Mitchell and Stafford (2000), and Jegadeesh and Karceski (2004).
7
Further, since the method is implemented in continuously compounded returns, it is free of biases attributable to
noisy prices identified in Asparouhova, Bessembinder, and Kalcheva (2012), while the calendar time portfolio
method is not.


5
The extant study that is closest to our own in terms of the research question posed is
Eckbo, Masulis, and Norli (2000). They note that the negative BHARs observed for SEO firms
in earlier studies potentially arise because event firms differ from matched firms in terms of
sensitivity to an array of macroeconomic risks. Consistent with this interpretation, they estimate
time series regressions of zero-investment portfolio (long event firms and short control firms)
returns on macroeconomic factors and report insignificant intercepts and some significant slope
coefficients. We note, though, that they estimate insignificant intercepts for portfolios of event
firms and portfolios of control firms as well, implying that abnormal returns are zero for both
SEO and control firms. Their study therefore highlights the tension between results obtained by
studying calendar time portfolio alphas versus studying BHARs relative to matched firms. We
show how this tension can be resolved by considering additional firm characteristics.

I. Data
I.A. Our Samples of Event Firms
This paper focuses in particular on the impacts of imperfect matching on long-run
abnormal stock returns after three types of corporate events: mergers and acquisitions, seasoned
equity offerings, and initial public offerings. However, the insights obtained here potentially
apply to studies of other corporate events such as stock splits, dividend initiations, etc.
To form the merger and acquisition sample, we identify completed mergers and
acquisitions by US public companies over the period 1980 to 2005 from Thomson Financials
SDC database. The sample ends with deals completed in 2005, to allow a five-year period to
measure bidder firms long-run stock returns. We impose the following filters. First, the
acquisition must take the following forms: merger (SDC deal form M), acquisition of majority


6
interest (AM), acquisition of remaining interest (AR), acquisition of partial interest (AP), or
acquisition of assets (AA). Second, the acquisition must be a control bid where the acquirer
owns less than fifty percent of the target and intends to hold more than fifty percent of the target
after the acquisition. These two filters follow Betton, Eckbo, and Thorburn (2008). In addition,
we require the relative size of the deal (transaction size divided by the market value of the bidder
firm before deal completion) to be greater than five percent, and the transaction value to be more
than one million dollars. The last filter excludes small deals that are less likely to have material
impacts on the long-run performance of the acquirer. We are able to identify 5,148 such
transactions.
We identify matching firms for the mergers and acquisitions sample using a procedure
similar to that of Lyon, Barber, and Tsai (1999) and Eckbo, Masulis, and Norli (2000). Each
matched firm is selected, on the basis of data from the end of December preceding the deal, as
the firm with the closest book-to-market ratio among firms with market capitalization between
70% and 130% of the bidder firm. To be included, the matching firm must not have itself
acquired other firms during the ten years around the matching date. If a matching firm delists,
then the candidate matching firm with the second closest book-to-market ratio is added for the
remainder of the five-year period. If the second matching firm delists, the candidate matching
firm with the third closest book-to-market ratio is added, etc. We are able to identify matching
firms for 4,579 of the bidder firms in our sample.
To form the SEO sample we first identify all completed SEOs contained in the SDC
database during the 1980 to 2005 period. Following Eckbo, Masulis, and Norli (2000, 2008) we
exclude ADRs, GDRs, unit offerings, financial companies, and public utilities. There are 7,204
such deals. For each, we select as a match the firm with the closest book-to-market ratio among


7
firms whose market capitalization is between 70% and 130% of the SEO firm at the end of
December preceding the SEO. To be included, the matching firm must not have conducted any
SEO during the ten years around the matching date. If a matching firm delists, then the
candidate matching firm with the second closest book-to-market ratio is added for the remainder
of the five-year period. We are able to identify matching firms for 5,573 of the SEO offerings in
our sample.
To form the IPO sample we first identify all completed IPOs in the SDC database over
the period 1980-2005, excluding REITs, closed-end funds, and ADRs, of which there are 9,035.
To form the matched firm sample we follow Loughran and Ritter (1995). Each IPO firm is
matched, based on data at the end of December after the IPO, with the firm with the closest but
greater market capitalization.
8
To be included, the matching firm must have been publicly traded
for more than five years. If a matching firm delists, then the candidate matching firm with the
second closest market capitalization is substituted for the remainder of the five-year period We
are able to identify matching firms for 8,987 of the IPO firms in our sample.
Table 2 reports the number of event firms in each sample on an annual basis. The
number of M&A deals is small before 1984 due to the limited coverage of the SDC database.
The number of event firms also shows substantial variation across sample years. In particular,
the number of IPOs jumps substantially in the 1990s to a peak of 797 in 1996, before declining
to less than 100 per year in years 2001 to 2003.

I.B. Characteristics of Event and Control Firms
The matching of event with control firms on the basis of firm size and B/M ratio is
standard in the literature on long run returns. However, as we demonstrate, firms matched on

8
Loughran and Ritter did not match on B/M ratio.


8
these characteristics are not necessarily well-matched on other characteristics, including
idiosyncratic volatility, illiquidity, return momentum, and market beta. In addition, firms that are
well-matched in terms of size and market capitalization as of a given date do not typically remain
well-matched in these dimensions as time passes.
We construct a measure of idiosyncratic volatility following Ang, Hodrick, Xing, and
Zhang (2006). In particular, for each event and control stock, idiosyncratic volatility is
computed as the annualized standard deviation of the residuals in a regression of daily stock
returns on the three Fama-French (1993) factors. We compute separate estimates for each of the
60 months before and after the corporate event. We measure illiquidity using the metric
introduced by Amihud (2002). In particular, for each stock and for each of the 60 months before
and after the corporate event, we compute the Amihud illiquidity measure as the average of the
daily ratio of absolute stock return to dollar trading volume. For each of the 120 months around
corporate events, we calculate return momentum for event and matching firms as their respective
cumulative returns from the 12
th
month to the 2
nd
month prior to that month. Market beta is
estimated for each firm in each of the 120 months around the corporate events by implementing
the market model in daily stock returns.
Figure 1 displays cross-sectional median idiosyncratic volatility, illiquidity, return
momentum, market beta, firms size, and B/M ratio for bidding firms and for matched firms, on a
monthly basis from 60 months before to 60 months after the bid. Notably, sample bidding firms
have greater median idiosyncratic volatility than their matching firms. Bidding firms also differ
from control firms in terms of illiquidity, as the median illiquidity of bidding firms is always
smaller than that of their matching firms over the 120 months around the M&A. Though not
displayed, bidding firms also have greater mean idiosyncratic volatility and smaller mean


9
illiquidity than their matching firms. We also observe that bidding firms have larger market
betas throughout the 120 month interval, and higher return momentum during approximately the
24 months surrounding the bid.
Figure 2 plots the same information for SEO sample firms and their size-and-book-to-
market-matched comparable firms. The SEO firms have greater median idiosyncratic volatility
than their matching firms over the 120 months around SEO. SEO firms have much lower levels
of illiquidity and larger betas as compared to their matching firms, particularly in the months
after the SEO. Further, SEO firms have greater return momentum in approximately the twenty
four months around the issue.
Figure 3 displays monthly medians on the same variables for the sample IPO firms and
their size-matched comparable firms over the 60 months after going public. The IPO firms are
characterized by substantially greater median idiosyncratic volatility and market beta, and
moderately less median illiquidity as compared to their matching firms.
Figures 1 to 3 also provide evidence regarding the extent to which event and control
firms are well-matched on the basis of firm size and book-to-market through time. While each
sample is indeed well matched on average at a point in time (the December prior to the event for
the merger and SEO samples and the December after the event for the IPO sample), the
closeness of the match degrades as time passes. The median size of bidding firms exceeds that
of control firms by the event date, and thereafter. The median size of SEO firms increases
substantially in the months before the SEO, and substantially exceeds that of the matched sample
throughout the post event period. In contrast the median size (as well as the median book-to-
market ratio) of IPO firms is considerably less than that of control firms during most of the post-
event period.


10
To summarize, Figures 1-3 show that the event firms differ on average from their size-
and-book-to-market-matched comparable firms in terms of idiosyncratic volatility, illiquidity,
market beta, and return momentum. All three types of event firms have greater idiosyncratic
volatility, smaller median illiquidity, and larger market betas than their matching firms. Since a
number of studies have shown mean security returns to be related to idiosyncratic volatility,
momentum, beta, and illiquidity, these results imply that divergences in buy-and-hold abnormal
returns (BHARs) after the corporate events returns across event and control firms in the months
following the events may be attributable in whole or part to differences in idiosyncratic volatility
and illiquidity. In addition, while event and control firms are well matched in terms of size and
book-to-market ratio at a point in time, the closeness of the match degrades in subsequent
months.
We assess in Section II whether BHARs are indeed related to divergences in firm
characteristics across event and control firms. In Section III we assess whether differences in
idiosyncratic volatility, illiquidity, momentum, and market beta, in combination with drift in
size and book-to-market ratios, can fully explain average BHARs for sample firms.

II. Firm Characteristics and BHARs: Univariate Analysis
To assess the potential effects of idiosyncratic volatility, illiquidity, return momentum,
and beta on computed BHARs, we divide the sample firms into quintiles based on the differences
in these characteristics between the event firms and their matching firms. For the M&A and
SEO samples we compute idiosyncratic volatility, illiquidity, return momentum, and beta over
the 12 months before the event, while for the IPO sample, these four firm characteristics are
computed over the 12 months after the IPO. We then average these estimates across the 12


11
months, and compute the difference in the average across event and matching firms. The
difference in return momentum between an event firm and its matching firm is calculated using
the cumulative returns over months -12 to -2 before the event (for M&As and SEOs) or over
months 1 to 11 after the event (for IPOs).
Table 3 reports the 10
th
through the 90
th
percentiles of the distribution of differences in
idiosyncratic volatility, illiquidity, return momentum, and beta between the event firms and their
matching firms. The results indicate substantial variation across firms in the extent of the
mismatch between event and control firm idiosyncratic volatility and illiquidity. For example,
more than forty percent of the SEO sample have idiosyncratic volatility that differs (in absolute
value) by more than 12% per year from that of their matching firms. The idiosyncratic volatility
of the 10
th
percentile IPO firm differs from that of the 90
th
percentile IPO firm by over 75% per
year. Sixty percent of bidding firms have estimated market betas that differ by more than 0.8, etc.
In Table 4 we report equal- and value-weighted BHARs for event firms over the 60
months after the corporate events. Following Eckbo, Masulis, and Norli (2008), the buy-and-
hold return of each event firm is calculated as its cumulative stock return from the first month
after the event to the earliest of the 60
th
month after the event, the delisting date of the event firm,
or the next corporate event of the same type. Each BHAR is computed as the buy-and-hold
return for the event firm less the buy-and-hold return for the matching control firm. We divide
event firms into quintiles based on differences in idiosyncratic volatility, illiquidity, return
momentum, and beta across event and control firms, and report average BHARs by quintile in
Table 4.
Panel A presents the BHARs of the bidding firms. Consistent with Betton, Eckbo, and
Thorburn (2008) we find that, for the full sample (reported on the bottom row), bidding firms


12
suffer negative BHARs of -12.04% on an equal- weighted basis and -17.16% when value-
weighted. However, BHARs differ substantially across subsamples with differing firm
characteristics. The BHARs of bidding firms significantly decrease as the difference in
idiosyncratic volatility increases. Bidding firms in the first two quintiles have modestly negative
or positive BHARs while the bidding firms in the last two quintiles have large negative BHARs.
For example, the bidding firms in the first idiosyncratic volatility quintile have a 60-month
equal-weighted BHAR of -2.60%, while those in the fifth quintile have a BHAR of -46.49%.
The BHARs of bidding firms significantly increase as the difference in illiquidity
increases. For example, the bidding firms in the first illiquidity difference quintile have a 60-
month equal-weighted BHAR of -29.49%, while those in the fifth quintile have a BHAR of
+13.09%.
In addition, we find that the 60-month BHARs weighted by market capitalization of the
bidding firms significantly decrease as the differences in beta and return momentum increase.
For example, the bidding firms in the first momentum difference quintile have 60-month value-
weighted BHARs of -9.61%, while those in the fifth quintile have a 60-month value-weighted
BHARs of -50.05%. Figure 4 depicts the BHARs of the bidding firms across the quintiles based
on idiosyncratic volatility, illiquidity, return momentum, and beta.
Panel B of Table 4 reports on BHARs for sample SEO firms. Consistent with Eckbo,
Masulis, and Norli (2000), Loughran and Ritter (1995), and Spiess and Affleck-Graves (1995),
we find that SEO firms earn negative BHARs: the equal-weighted 60-month BHARs are -8.65%,
while the value-weighted 60-month BHARs are -19.55%. However, we again observe cross-
sectional variation in BHARs related to firm characteristics. The BHARs for SEO firms
significantly decrease as the difference in idiosyncratic volatility increases, a similar pattern as


13
the bidding firms. The SEO firms in the first quintile based on difference in idiosyncratic
volatility have positive five-year BHARs, while those in the last quintiles have negative BHARs.
For example, the SEO firms in the first idiosyncratic volatility difference quintile have a 60-
month equal-weighted BHAR of +18.75%, while those in the fifth quintile have a BHAR of -
26.68%.
The BHARs of the SEO firms also significantly increase as the difference in illiquidity
increases. The pattern, again, is similar to that of the bidding firms. For example, the SEO firms
in the first quintile based on difference in illiquidity have a 60-month equal-weighted BHAR of -
13.07%, while those in the fifth quintile have a BHAR of +13.08%.
The value-weighted BHARs of the SEO firms also significantly decrease as the
differences in beta and return momentum increase. For example, the SEO firms in the first
momentum difference quintile have a60-month value-weighted BHARs of -6.74%, while those
in the fifth quintile have 60-month value-weighted BHARs of -35.19%. Figure 5 depicts the
BHARs of the SEO firms across the quintiles based on idiosyncratic volatility, illiquidity, return
momentum, and beta.
Panel C of Table 4 presents BHARs for IPO firms. Consistent with Loughran and Ritter
(1995) and Eckbo, Masulis, and Norli (2008), IPO firms suffer significant negative BHARs for
the full sample, of -47.90% on an equal-weighted basis and -55.06% on a value-weighted basis.
The BHARs of the IPO firms significantly decrease as the difference in idiosyncratic volatility
increases, a similar pattern as the bidder firms and the SEO firms. The IPO firms in the first two
quintiles based on difference in idiosyncratic volatility have positive BHARs, while those in the
last two quintiles have significantly negative BHARs. For example, the IPO firms in the first
idiosyncratic volatility difference quintile have a 60-month equal-weighted BHAR of -8.59%,


14
while those in the fifth quintile have a BHAR of -113.44%. In contrast, the BHARs of the IPO
firms are not monotone across the quintiles based on difference in illiquidity. The value-
weighted BHARs of the IPO firms decrease significantly as the beta difference increases. The
IPO firms in the first beta difference quintile have value-weighted BHARs of -24.49%, much
greater than the value-weighted BHARs of the IPO firms in the fifth beta difference quintile
which are -104.81%. Figure 6 depicts the BHARs of the IPO firms across the quintiles based on
idiosyncratic volatility and illiquidity.
In summary, we find that long-run BHARs for M&A bidder firms and firms issuing
initial and secondary equity offerings are systematically related to differences in idiosyncratic
volatility and illiquidity between the event firms and their matching control firms. In general,
the effects on BHARs are as would be anticipated based on the extant literature. In particular,
Ang, Hodrick, Xing, and Zhang (2006) document lower average returns for firms with greater
idiosyncratic volatility. Consistent with this insight, we document larger BHARs for firms with
lower idiosyncratic volatility as compared to their matched counterparts, and vice versa, for the
bidder, SEO, and IPO samples. Amihud (2002) and others document higher average returns for
firms with greater illiquidity. Consistent with this finding, we document smaller BHARs for
firms with smaller illiquidity, as compared to their matched counterparts, and vice-versa, for the
bidder and SEO samples. For the IPO sample, in contrast, the relation between BHARs and the
extent of the illiquidity mismatch is not monotone. We also find weaker evidence that the
BHARs of the event firms are associated the differences in beta and return momentum between
the event firms and their matching firms.
The analysis in this section was based on univariate comparisons. Of course, illiquidity,
idiosyncratic volatility, return momentum, and beta may be correlated, and may all matter for


15
BHARs. We next turn to a multivariate analysis of BHARs that simultaneously considers
illiquidity, idiosyncratic volatility, firm size, market to book ratios, return momentum, and
market beta.

III. Firm Characteristics and BHARs
In Section II, we show that firm characteristics, and in particular illiquidity and
idiosyncratic volatility, are significantly related to the BHARs of the event firms. In this section,
we propose a general framework to investigate the effects of time series and cross-sectional
variation in firm characteristics on long-run abnormal stock returns after corporate events.

III.A Model for Long-run Stock Returns after Corporate Events
The BHAR of event firm e over T months after a corporate event at date 0 is:
} ) 1 ln( exp{ } ) 1 ln( exp{ ) 1 ( ) 1 (
1 1 1 1
[ [
= = = =
+ + = + + =
T
t
mt
T
t
et
T
t
mt
T
t
et eT
r r r r BHAR , (1)
where r
et
and r
mt
are the monthly stock returns of the event firm and its firm-characteristics-
matched comparable firm, respectively. Consider also the wealth relative (WR) as defined by
Ritter (1991) and Loughran and Ritter (1995):
.
) 1 (
) 1 (
)} 1 ln( ) 1 {ln( exp{
1
1
1
[
[

=
=
=
+
+
= + + =
T
t
mt
T
t
et
mt
T
t
et eT
r
r
r r WR
(2)

Wealth relative measures the T-period gross return to a $1 investment in the event firm relative
to the T-period gross return to the same investment in the matching firm. Testing whether
0 =
eT
BHAR is equivalent to testing whether 1 =
eT
WR , as both equations hold if the time series
mean log return is equal across event and control firms.


16
Guided by the evidence reported in Section II and the equivalence between testing
expressions (1) and (2), we propose to explain the differences in monthly stock returns between
the event firm and its matching firm based on differences in firm characteristics. In light of the
evidence displayed on Figures 1 through 3, we measure firm characteristics on a monthly basis,
allowing time variation in the closeness of the match between event and control firms to
contribute to a potential explanation of abnormal returns.
We consider six characteristics that have been shown to be associated with expected
stock returns: market beta, firm size, B/M, momentum, illiquidity, and idiosyncratic volatility.
Market beta for July of year t to June of year t+1 is estimated using the market model in monthly
stock returns during years t-5 to t-1. Firm size is measured as market capitalization at the end of
the latest June. B/M is defined as the ratio of the book value of common equity at the end of
fiscal year t-1 to the market value of common equity at the end of the latest June. Momentum is
the cumulative return over months -12 to -2. Idiosyncratic risk is the annualized standard
deviation of the residuals obtained in a Fama-French three factor regression implemented in
daily returns during month -2. Illiquidity for July of year t to June of year t+1 is computed as
the average ratio of daily absolute stock return to dollar trading volume from July of year t-1 to
June of year t, relative to market average illiquidity during the same period, as in Amihud
(2002).
Specifically, we employ the following regression model to investigate the effects of firm
characteristics on long-run stock returns after a corporate event:
, ..., 3, 2, , 1 ; ..., 3, 2, , 1


/ ) 1 ln( ) 1 ln(
6 5 4
3 2 1
T t E e
IdioVol y Illiquidit Mom
M B Size Beta r r
et et et et
et et et mt et
= =
+ A + A + A +
A + A + A + = + +
c | | |
| | | o
(3)


17
where denotes a normalized difference in the associated firm characteristic across the event
firm and the matching firm.
We normalize the firm-characteristic variables to make comparable coefficients across
characteristics, as follows. For each of the six firm characteristics (beta, size, B/M, momentum,
illiquidity, and idiosyncratic volatility), we compute the difference between the event firm and its
matching firm on a monthly basis. Then, for each characteristic, the positive differences are
sorted from smallest to largest and converted to percentile rankings. Negative differences are
separately sorted from least to most negative and converted to minus the percentile ranking.
The normalized differences therefore range from -1 to 1 for each of the firm characteristics.
Note that each of the normalized characteristics is measured on the basis of information available
prior to month t.
The key to assessing abnormal returns in this specification is the estimated intercept. As
in any regression specification, the intercept measures the mean of the dependent variable,
conditional on outcomes of zero for each independent variable. When (2) is estimated without
any explanatory variables the estimated intercept measures the differential in the average
continuously compounded return across event and control firms. As noted above, testing
whether this differential is zero is equivalent to testing whether the BHAR is zero. When
standardized explanatory variables are included in the regression the intercept estimates the mean
abnormal log return to event firms, conditional on no difference in firm characteristics across
event and control firms.
This regression-based method offers four advantages over the BHAR method
implemented in the previous literature. First, it accommodates variation in firm characteristics


18
other than those used to select the matched firms.
9
Second, it accommodates variation across
time in firm characteristics. Third, it addresses the compounding problem of BHARs noted by
Fama (1998) and Mitchell and Stafford (2000), whereby BHARs grow as stock returns are
cumulated over a long period even if the abnormal return is confined to a few periods.
Fourth, as Barber and Lyon (1997) and Lyon, Barber, and Tsai (1999) observe, long-run
BHARs are skewed and have fat tails, rendering statistical inferences difficult. In contrast, the
difference in monthly log returns, which is used as the dependent variable in our proposed
specification, has better statistical properties. In Table 5, we report the standardized (scale
invariant) skewness and kurtosis of BHARs for our samples. The skewness of the BHARs
ranges from -2.24 (SEOs) to 27.24 (M&As), and the kurtosis of the BHARs ranges from 69.22
(SEOs) to 1365.07 (M&As). The skewness and kurtosis of the differences in log returns are
much smaller, with the skewness ranging from -0.23 to -0.15 and the kurtosis ranging from 9.36
to 11.68.

III.B. Firm Characteristics and Abnormal Returns after M&As
Table 6 reports results of estimating equation (3) for returns to bidders and matched firms
in the sixty months following mergers and acquisitions completed from 1980-2005. Panel A1
reports results obtained from estimating equation (3) in pooled time series and cross sectional
data, while Panel A2 reports results obtained by the Fama-MacBeth procedure, where a cross-
sectional regression is estimated for each sample month and final estimates are obtained as the
time-series mean of the monthly estimates.

9
In principle the matching algorithm can consider additional characteristics as well, but the quality of matches will
degrade as the number of matching characteristics increases.


19
Column (1) of Table 6 Panel A1 reports results obtained by pooled OLS estimation, with
no controls for firm characteristics. The estimated constant, which is the mean continuously
compounded differential in returns for bidding vs. control firms, is -0.42%. Stated alternately,
the wealth relative is given by expression (2) as 0.78 (= exp(-0.0042*60)), even though bidders
are matched to control firms on the basis of size and B/M ratio.
The residuals in a pooled time series cross sectional analysis may be correlated within
firms or over time, leading to biases in estimates of the coefficient standard errors, as
emphasized by Petersen (2009). To allow for the possible correlations, we compute standard
errors while allowing for residual clustering by M&A deal and by date, and report results in
columns (2) and (3), respectively. Clustering by deal barely changes the t-statistic for the
intercept, indicating relatively small correlation of residuals across time within deals. On the
other hand, clustering by date significantly decreases the magnitudes of the t-statistic from -7.92
to -4.21. The decrease in the absolute t-statistic indicates significant correlations in residuals
across firms on given dates. This correlation, in turn, likely reflects that a given calendar date
will typically be contained in the sixty month interval used to assess BHAR for numerous events.
The remainder of the results we report allow for clustering by date.
The regression results reported in column (4) are based on the same specification as used
for column (3), but we exclude firm-months where any firm characteristic datum is unavailable.
The estimated constant in column (4) is -0.42%, the same as column (3) results, indicating that
the restriction on availability of firm characteristics does not materially affect inference
regarding BHARs.
Column (5) reports results when illiquidity and idiosyncratic volatility are included in the
pooled OLS regression with standard errors clustered by date. We observe that illiquidity is


20
positively associated with abnormal returns, while idiosyncratic volatility is negatively
associated with abnormal returns. Both effects are statistically significant at the one percent level.
The estimated intercept is reduced from -0.42% in column (2) to -0.26% (corresponding to a
wealth relative of 0.86) in column (5). That is, variation across firms and over time in illiquidity
and idiosyncratic volatility explains about 35% (= (0.86-0.78)/(1-0.78)) of the observed BHARs
for bidding firms. Column (6) reports results when market beta is added as an explanatory
variable. Market beta is negatively and statistically insignificantly associated with abnormal
returns, but has no material effect on the estimated intercept.
Column (7) reports results when all six firm characteristics are included in the regression.
We observe that B/M, momentum, and illiquidity are positively associated with abnormal returns,
while idiosyncratic volatility is negatively associated with returns. The estimated slope
coefficients on B/M, momentum, illiquidity, and idiosyncratic volatility are all statistically
significant in column (7), underscoring the importance of allowing for variation in these
characteristics. That the coefficient on B/M is significant even though firms are matched on
this characteristic reflects both imperfect matching and that the closeness of the match degrades
over time.
However, the inclusion of size, B/M, and momentum has no material impact on the
estimated constant, which decreases from -0.25% from in column (6) to -0.27% (corresponding
to a wealth relative of 0.85) in column (7). We conclude that inclusion of firm characteristics in
the pooled regression explains about a third of the bidder abnormal returns.
Petersen (2009) demonstrates that, in those cases where residuals are correlated across
firms at a given date but not over time, the Fama-MacBeth (1973) procedure provides unbiased
estimates of standard errors. In addition, the Fama-MacBeth procedure has been widely used in


21
the literature to assess relations between stock returns and firm characteristics (e.g. Fama and
French, 1992, 1993).
We present results of estimating expression (3) by the Fama-Macbeth method for the
bidding firm sample in Panel A2 of Table 6. Column (1) reports the results obtained by
implementing the Fama-MacBeth procedure, with no controls for firm characteristics. The
estimated intercept term decreases in absolute magnitude to -0.29% (corresponding to a wealth
relative of 0.84) from -0.42% (corresponding to a wealth relative of 0.78) in column (1) of Panel
A1. The constant term in the pooled OLS regression reveals the mean abnormal return across
the firm-months in our sample, while the constant term estimated from the Fama-MacBeth
procedure reveals the time series mean of monthly average abnormal returns. Stated alternately,
the pooled OLS regression assigns equal weight to each event firm, while the Fama-MacBeth
procedure assigns equal weight to each event month. The latter procedure alone reduces the
estimated abnormal returns by about 28%.
10

Column (2) of Panel A2 reports results obtained when illiquidity and idiosyncratic
volatility are included in the Fama-MacBeth regression. Both idiosyncratic volatility and
illiquidity are statistically significant. The estimated intercept decreases further, to -0.22%
(corresponding to a wealth relative of 0.88), with an associated t-statistic of 2.47.
Column (3) reports results when market beta is also included in the Fama-MacBeth
regression. Although the estimated coefficient on market beta is not significant (t-statistic = -
1.42), its inclusion alters inference: the estimated constant term increases to -0.15%,
(corresponding to a wealth relative of 0.91), which is statistically insignificant (t-statistic = -1.26).

10
We do not take a position that either method is inherently superior, but simply observe that the weighting method
is relevant to inference. See Fama (1998), Loughran and Ritter (2000), and Mitchell and Stafford (2000) for
additional discussion of the event firm vs. event time weighting issue.


22
Thus, this specification supports the conclusion that there is no long run abnormal return
performance for bidding firms.
Finally, column (4) of Panel A2 reports results when all six characteristics are included in
the Fama-MacBeth regression. Idiosyncratic volatility remains negative and significant (t-
statistic = 2.11) in this specification, verifying that BHARs computed without controlling for
differentials in volatility will be misleading. Most important, the estimated intercept becomes
positive in this specification to +0.54%, which is statistically insignificant with an associated t-
statistics of 0.95. That is, the Fama-MacBeth specification, implemented while allowing for time
varying differences in firm characteristics across event and control firms, provides no evidence
of statistically significant long run abnormal returns for the sample of bidder firms. This result
stands in contrast to Loughran and Vijh (1997), but is consistent with the conclusions of Moeller,
Schlingemann, and Stulz (2004), Harford (2005), and Betton, Eckbo, and Thorburn (2008), and
Rau and Vermaelen (1998).

III.C. Firm Characteristics and Abnormal Returns after SEOs
We next assess results of estimating expression (3) for sample of SEO firms and their
matched counterparts. Panel B1 of Table 6 reports results of pooled time-series cross-sectional
estimation, while Panel B2 reports results of implementing the Fama-MacBeth procedure.
Consistent with prior studies, including Loughran and Ritter (1995), Spiess and Affleck-
Graves (1995), Jegadeesh (2000) and Eckbo, Masulis, and Norli (2008), the estimated intercept
in each of the first four regressions of Table 6 Panel B1 is negative and statistically significant,


23
indicating that abnormal returns are significant negative. In terms of economic significance, the
estimated intercept is -0.25% for the full sample, corresponding to a wealth relative of 0.86.
11

Column (5) reports results when illiquidity and idiosyncratic volatility are included in the
pooled OLS regression. We observe that illiquidity is positively associated with abnormal return,
while idiosyncratic volatility is negatively associated with abnormal return. Both effects are
statistically significant. More important, the intercept becomes both statistically and
economically insignificant with only these two firm characteristics included. The magnitude of
the intercept shrinks from -0.25% (corresponding to a wealth relative of 0.86) to -0.07%
(corresponding to a wealth relative of 0.96). The associated t-statistics shrinks from -2.14 in
column (3) to -0.71 in column (5).
In column (6), market beta is also included as a control variable in addition to illiquidity
and idiosyncratic volatility. Adding market beta to the regression does not materially change the
regression results. For example, the intercept becomes -0.06% and remains statistically
insignificant with an associated t-statistic of -0.68. Column (7) reports results when all six firm
characteristics are included in the regression. We observe that B/M, momentum, and illiquidity
are positively associated with abnormal returns, while idiosyncratic volatility is negatively
associated with returns. Notably, the inclusion of size, B/M, and momentum has no material
impact on the estimated constant, which decreases from -0.06% from in column (6) to -0.08%
(corresponding to a wealth relative of 0.95) in column (7) and remains statistically insignificant.
We conclude that variation in firm characteristics across event and control firms fully explain
abnormal returns to firms that completed SEOs during our 1980 to 2005 sample period.

11
Comparing estimated t-statistics across column 1 (estimated by OLS), column 2 (allowing for clustering by deal)
and column 3 (allowing for clustering by date), we again conclude that clustering by date is empirically important,
and implement such for the remainder of our SEO results.


24
For completeness, we present results of estimating expression (3) by the Fama-Macbeth
method for the SEO firm sample in Panel B2 of Table 6. Column (1) reports the results
obtained by implementing the Fama-MacBeth procedure, with no controls for firm
characteristics. The estimated intercept term decreases in absolute magnitude to -0.16%
(corresponding to a wealth relative of 0.91) from -0.25% (corresponding to a wealth relative of
0.86) in column (1) of Panel A1, and becomes statistically insignificant with an associated t-
statistic of -1.34. The results indicate that the Fama-MacBeth estimation procedure, which
equal weights each event month, is alone is able to partially explain the BHARs of the SEO firms.
A subset or all of the six firm characteristics are included as controls in the Fama-
MacBeth regressions in columns (2)-(4) of Table 6 Panel B2. Across these three columns, we
observe that B/M, momentum, and illiquidity are positively and significantly associated with
abnormal returns, while idiosyncratic volatility is negatively and significantly associated with
abnormal returns. More important, the estimated intercepts in the three specifications are all
statistically insignificant. Thus, both pooled and Fama-MacBeth regression analyses support the
conclusion that, after allowing for variation in firm characteristics, there is no evidence of
significant abnormal long run returns for SEO firms in the 1980 to 2005 period.

III.D. Firm Characteristics and Abnormal Returns after IPOs
We now turn to results of estimating expression (3) for firms conducting IPOs between
1980 and 2005. Panel C1 of Table 6 reports results of pooled time-series cross-sectional
estimation, while Panel C2 reports results of implementing the Fama-MacBeth procedure.
Consistent with Loughran and Ritter (1995), the estimated intercept from the pooled
sample without controls for firm characteristics (column 1 of Panel C1) indicates very significant


25
underperformance of IPO firms versus matching firms. The point estimate of -1.16% implies a
wealth relative of 0.50. Clustering standard errors by date dramatically reduces the magnitude
of the t-statistic of the estimated intercept from -31.58 to -4.97 in column (3). Restricting the
sample to IPOs for which all firm characteristic data is available reduces the estimated intercept
(column 4) slightly to -0.97%.
Column (5) reports results when idiosyncratic volatility and illiquidity are included in the
regression. As anticipated, the estimated coefficient on the former is negative and significant,
while that on the latter is positive and significant, and their inclusion further reduces the absolute
magnitude of the estimated intercept, to -0.74%. Inclusion of all six firm characteristics
(column 7) reduces the estimated intercept further, to -0.44% with a corresponding wealth
relative of 0.77. The combined effect of allowing for differences in firm characteristics across
IPO and control firms is to reduce the estimated intercept by more than half.
As in the cases of M&As and SEOs, we find that B/M, momentum, and illiquidity are
positively and significantly associated with abnormal returns, while idiosyncratic volatility is
negatively and significantly associated with abnormal returns. These results reinforce the
desirability of controlling for variation in firm characteristics in studies of long run abnormal
returns.
As noted, Petersen (2009) recommends the Fama-MacBeth procedure when residuals are
clustered within a date but not across dates. Table 6 Panel C2 reports results of estimating
expression (3) for the IPO sample by the Fama-MacBeth method. Column (1) reports the
estimated constant when no firm characteristics are included. The point estimate is -0.90%
(corresponding to a wealth relative of 0.68) indicating that equally weighting each time period
(rather than equally-weighting each firm-month, as in Panel C1) reduces the sixty month only


26
modestly. Column (2) reports results when idiosyncratic volatility and illiquidity are included as
regressors. Here also, the estimated coefficient on illiquidity is positive and that on volatility is
negative, and each is statistically significant. The accompanying intercept estimate is reduced to
-0.77% per month.
Column (3) reports results when market beta is included as a regressor. Similar to results
obtained for M/A bidder firms, the estimated coefficient on market beta is not significant (t-
statistic = -0.39), but its inclusion alters inference. In particular, the estimated intercept declines
in absolute magnitude to -0.38% per month, with a t-statistic of -1.84.
Column (4) reports results obtained when all six firm characteristics are included in the
Fama-MacBeth regression. Here, the difference in B/M ratio, difference in momentum, and
difference in idiosyncratic volatility continue to have significant explanatory power for abnormal
returns. Most importantly, the estimated intercept in this specification is reduced in absolute
magnitude to -0.24%, which corresponds to a wealth relative of 0.87, and which does not differ
significantly from zero (t-statistic = -1.15).
To summarize, this analysis studies mean long run abnormal returns after three important
corporate events, including returns to bidder firms in merger and acquisition deals, to issuing
firms making secondary public offerings, and to firms making initial public offerings. We
document that abnormal returns to event firms do not differ significantly from zero after
controlling for differences between event firms and control firms in observable firm
characteristics.

III.D Discussion


27
Numerous studies document significant BHARs after corporate events, and ascribe the
returns to the events themselves. However, we document that event and control firms are
imperfectly matched. The characteristics we consider, i.e. firm size, B/M ratio, illiquidity, return
momentum, market beta, and idiosyncratic volatility, are known from the prior literature to have
explanatory power for stock returns. Observing significant BHARs for event firms therefore has
at least two possible interpretations. The abnormal returns may be directly associated with the
event being studied, or may reflect, in full or part, differences in firm characteristics across event
and control firms. The results in this section show that the latter interpretation is appropriate.
When results are weighted equally across firms and events (as in OLS estimation of a pooled
time-series cross-sectional version of expression (3) we find that variation in characteristics
explains a substantial portion or even all of observed BHARs. When results are weighted
equally across time (when the Fama-MacBeth procedure is implemented to estimate expression
(3) we find that variation in firm characteristics completely explains BHARs for M&A bidding
firms, IPO firms, and SEO firms.

IV. Robustness
We perform a series of robustness tests regarding the key results reported in Section III.
First, we assess the potential effect of non-linear relations between abnormal returns and firm
characteristics. Figure 6 indicates that the relation between BHARs and illiquidity for IPO firms,
in particular, may be non-linear. To do so, we estimate equation (3) by OLS and by the Fama-
MacBeth method, while including both the level and the square of each normalized difference in
firm characteristics.


28
Results are reported in Table 7; Columns (1) and (2) pertain to the bidder firm sample,
columns (3) and (4) to the SEO sample, and columns (5) and (6) to the IPO sample. In general,
the results provide little evidence of significant non-linear effects. While OLS estimation in the
pooled sample yields some apparently significant t-statistics (e.g. for the squared effect of
idiosyncratic volatility and market beta when explaining abnormal returns to bidders), these are
generally no longer significant when the Fama-MacBeth procedure is used. More important,
estimated intercepts obtained when using both pooled OLS and the Fama-MacBeth method are
statistically insignificant for all three samples. We conclude that our key empirical finding, that
differences in firm characteristics between event and control firms can fully explain the apparent
long term abnormal returns to bidder, IPO, and SEO firms, is robust to possible non-linear
relations. Indeed, when non-linear effects are included, firm characteristics fully explain
abnormal returns after these corporate events, whether weighting each deal equally (as in pooled
OLS estimation) or weighting each time period equally (as in the Fama-MacBeth estimation).
As noted in Section II, we follow the existing literature in matching event and control
firms for the bidder and SEO samples on the basis of market capitalization and M/B ratio as of
the end of the December prior to the event. However, as Figures 1 and 2 show, this matching
method does not ensure that firms remain well-matched thereafter. In particular, Figure 2 shows
that SEO event firms are considerably larger and have lower B/M ratios as of the event date.
We therefore assess outcomes when matching firms are paired with event firms on the
basis of firm size and B/M ratios at the month end prior to the event date, rather than the prior
December. Results of estimating expression (3) for returns to event firms and the revised set of
control firms are reported in Table 8. Panel A pertains to the bidder firm sample, while Panel B
pertains to the SEO sample.


29
In general, results are very similar to those reported on Table 6. Results of implementing
the Fama-MacBeth procedure continue to indicate insignificant intercepts for both the bidder
firm (t-statistic = -0.89) and the SEO (t-statistic = 0.01) samples. We conclude that the key
empirical result that differences in firm characteristics between event and control firms explain
apparent long term abnormal returns is robust to choosing matching firms for the bidder and
SEO firms on the basis of event date size and M/B as well.

V. Conclusions
Numerous studies document significant abnormal returns after corporate events, and
ascribe the returns to the events themselves. However, conclusions often differ depending on
the method used to measure abnormal returns. We focus on the buy-and-hold abnormal return
(BHAR) method, where accumulated returns to event firms are compared to accumulated returns
on control firms, typically matched on the basis of size and B/M ratio.
We document that typical matching algorithms for event and control firms are imperfect,
in that matched firms differ significantly in terms of illiquidity, idiosyncratic volatility, return
momentum, and market beta. Further, though typical matching procedures are successful in
matching event and control firms on the basis of size and B/M ratio at a point in time, the quality
of these matches degrade over time. These mismatches in firm characteristics are potentially
relevant since the extant literature shows that returns are systematically related to these firm
characteristics. Observing significant BHARs for event firms therefore has at least two possible
interpretations. The abnormal returns may be directly associated with the event being studied,
or may reflect, in full or part, differences in firm characteristics across event and control firms.


30
We introduce a simple regression-based method to distinguish between these
explanations, and show that the latter interpretation is appropriate. When results are weighted
equally across firms and events (by OLS estimation of a pooled time-series cross-sectional
regression), we find that variation in characteristics explains a substantial portion of observed
BHARs. When results are weighted equally across time (by implementation of the Fama-
MacBeth method), we find that variation in firm characteristics completely explains BHARs for
M/A bidding firms, IPO firms, and SEO firms. Our results therefore substantially reconcile the
diverging results obtained in the literature in studies that assess long run abnormal returns by
measuring BHARs versus those that study alphas to calendar-time portfolios formed from
event firms.
We focus in particular on firms undergoing three specific corporate events, including
bidding firms engaged in mergers and acquisitions, and firms issuing equity in initial or
secondary public offerings. However, the issues that we address and the regression based
estimation procedure we implement, are applicable to a wide variety of corporate events where it
may be of interest to measure abnormal stock returns after the event, including dividend
initiations and omissions, management turnover, stock splits, etc.


31
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33
Jegadeesh, Narasimhan, and Jason J. Karceski, 2004, Long-Run Performance Evaluation:
Correlation and Heteroskedasticity-Consistent Tests, Journal of Empirical Finance 16, 101-111.
Jegadeesh, Narasimhan, and Sheridan Titman, 1993, Returns to Buying Winners and Selling
Losers: Implications for Stock Market Efficiency, Journal of Finance 48, 65-91.

Jiang, George J., Daniele Xu, and Tong Yao, 2009, The Information Content of Idiosyncratic
Risk, Journal of Financial and Quantitative Analysis 44, 1-28.
Jiang, Xiaoquan, and Bong-Soo Lee, 2006, On the Dynamic Relation between Returns and
Idiosyncratic Volatility, Financial Management 35, 4365.
Kothari, S.P., and Jerold B. Warner, 1997, Measuring Long-Horizon Security Price
Performance, Journal of Financial Economics 43, 301-339.
Loughran, Tim, and Jay R. Ritter, 1995, The New Issues Puzzle, Journal of Finance 50, 23-51.
Loughran, Tim, and Jay R. Ritter, 2000, Uniformly Least Powerful Test of Market Efficiency,
Journal of Financial Economics 55, 361-389.
Loughran, Tim, and Anand M. Vijh, 1997, Do Long-term Shareholders Benefit from Corporate
Acquisitions?, Journal of Finance 52, 1765-1790.
Lyon, John D., Brad M. Barber, and Chih-Ling Tsai, 1999, Improved Methods for Tests of
Long-Run Abnormal Stock Returns, Journal of Finance 54, 165-201.
Mitchell, Mark L., and Erik Stafford, 2000, Managerial Decisions and Long-Term Stock Price
Performance, Journal of Business 73, 287-329.
Moeller, Sara B., Frederik P. Schlingemann, and Rene M. Stulz, 2004, Firm Size and the Gains
from Acquisitions, Journal of Financial Economics 73, 201-228.
Pstor, Lubos, and Robert F. Stambaugh, 2003, Liquidity Risk and Expected Stock Returns,
Journal of Political Economy 111, 642-685.
Petersen, Mitchell A., 2009, Estimating Standard Errors in Finance Panel Data Sets: Comparing
Approaches, Review of Financial Studies 22, 435-480.

Rau, P. Raghavendra, and Theo Vermaelen, 1998, Glamour, Value and the Post-acquisition
Performance of Acquiring Firms, Journal of Financial Economics 49, 223-253.
Ritter, Jay R., 1991, The Long-run Performance of Initial Public Offerings, Journal of Finance
46, 3-27.
Spiess, D. Katherine, and John Affleck-Graves, 1995, Underperformance in Long-run Stock
Returns Following Seasoned Equity Offerings, Journal of Financial Economics 38, 243-267.


34
Figure 1 Characteristics of the Bidding Firms and Their Size- and B/M-Matched Comparable Firms

This figure plots the time series of the median size, B/M, momentum, idiosyncratic volatility, and illiquidity of the
bidding firms and their size- and B/M-matched comparable firms, for the 60 months before and after the deal
effective date. Month 0 corresponds to the month in which the deal is completed. At the end of the latest December
before the deal effective date, each bidder is matched with a firm whose market capitalization is between 70% and
130% of the bidder and has the closest book-to-market ratio. The sample has 4,579 bidders over the period 1980-
2005. Beta is the monthly market beta estimated using daily stock returns in each month. Size is the market
capitalization at the end of each month. B/M is defined as the ratio of the book value of common equity at the end of
fiscal year t-1 to the market value of common equity at the end of June of year t. Momentum is the cumulative return
over months -12 to -2. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in
the Fama-French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar
trading volume.




.
5
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6
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7
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9
B
e
t
a
-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
Bidder Match
Median Beta of Bidder and Matching Firm
1
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Bidder Match
Median Size of Bidder and Matching Firm
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Bidder Match
Median BM of Bidder and Matching Firm
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Month
Bidder Match
Median Momentum of Bidder and Matching Firm
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Bidder Match
Median Idiosyncratic Volatility of Bidder and Matching Firm
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
Bidder Match
Median Illiquidity of Bidder and Matching Firm


35
Figure 2
Characteristics of the SEO Firms and Their Size- and B/M-Matched Firms

This figure plots the time series of the median size, B/M, momentum, idiosyncratic volatility, and illiquidity of the
SEO firms and their size- and B/M-matched comparable firms, for the 60 months before and after the equity offering.
Month 0 corresponds to the month of equity offering. At the end of the latest December before the offering, each
SEO firm is matched with a firm whose market capitalization is between 70% and 130% of the SEO firm and has
the closest book-to-market ratio. The sample has 5,573 SEO firms over the period 1980-2005. Beta is the monthly
market beta estimated using daily stock returns in each month. Size is the market capitalization at the end of each
month. B/M is defined as the ratio of the book value of common equity at the end of fiscal year t-1 to the market
value of common equity at the end of June of year t. Momentum is the cumulative return over months -12 to -2.
Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama-French three
factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume.






.
6
.
8
1
B
e
t
a
-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
SEO Match
Median Beta of SEO and Matching Firm
1
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1
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
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SEO Match
Median Size of SEO and Matching Firm
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
SEO Match
Median BM of SEO and Matching Firm
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
SEO Match
Median Momentum of SEO and Matching Firm
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
SEO Match
Median Idiosyncratic Volatility of SEO and Matching Firm
0
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-60 -54 -48 -42 -36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 42 48 54 60
Month
SEO Match
Median Illiquidity of SEO and Matching Firm


36
Figure 3
Characteristics of the IPO Firms and Their Size-Matched Comparable

This figure plots the time series of the median size, B/M, momentum, idiosyncratic volatility, and illiquidity of the
IPO firms and their size-matched comparable firms, for the 60 months after the public offering. Month 0
corresponds to the month of initial public offering. At the end of December after the IPO, each IPO firm is matched
with a firm with the closest but greater market capitalization. The sample has 8,987 IPOs over the period 1980-2005.
Beta is the monthly market beta estimated using daily stock returns in each month. Size is the market capitalization
at the end of each month. B/M is defined as the ratio of the book value of common equity at the end of fiscal year t-1
to the market value of common equity at the end of June of year t. Momentum is the cumulative return over months
-12 to -2. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama-
French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume.





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4
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0 6 12 18 24 30 36 42 48 54 60
Month
IPO Match
Median Beta of IPO and Matching Firm
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Month
IPO Match
Median Size of IPO and Matching Firm
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Month
IPO Match
Median BM of IPO and Matching Firm
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Month
IPO Match
Median Momentum of IPO and Matching Firm
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Month
IPO Match
Median Idiosyncratic Volatility of IPO and Matching Firm
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Month
IPO Match
Median Illiquidity of IPO and Matching Firm


37
Figure 4
BHARs of the Bidding Firms, by Differences in Firm Characteristics between the Bidder Firms and Their
Size- and B/M-Matched Comparable Firms

This figure plots the equal- and value-weighted BHARs of the bidding firms. The bidders are grouped into quintiles
based on the differences in the average beta over the 12 months before deal completion, cumulative return over
months -12 to -2 before deal completion, average idiosyncratic volatility over the 12 months before deal completion,
and average illiquidity over the 12 months before deal completion, respectively, of the bidder and its size- and book-
to-market-ratio-matched comparable firm. At the end of the latest December before the deal effective date, each
bidder is matched with a firm whose market capitalization is between 70% and 130 percent of the bidder and has the
closest book-to-market ratio. The sample has 4,579 bidders over the period 1980-2005. Beta is the monthly market
beta estimated using daily stock returns in each month. Momentum is the cumulative return over months -12 to -2
before deal completion. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in
the Fama-French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar
trading volume.







-30
-20
-10
0
10
1 2 3 4 5
5
-
y
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a
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E
W

B
H
A
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(
%
)

Quintiles based on difference in beta 1 year before M&A
-40
-30
-20
-10
0
1 2 3 4 5
5
-
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a
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(
%
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Quintiles based on difference in beta 1 year before M&A
-25
-20
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-10
-5
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1 2 3 4 5
5
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a
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(
%
)

Quintiles based on difference in momentum before M&A
-60
-50
-40
-30
-20
-10
0
1 2 3 4 5
5
-
y
e
a
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V
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(
%
)

Quintiles based on difference in momentum before M&A
-60
-40
-20
0
20
1 2 3 4 5
5
-
y
e
a
r

E
W

B
H
A
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(
%
)

Quintiles based on difference in idiosyncratic volatility 1 year
before M&A
-60
-40
-20
0
20
1 2 3 4 5
5
-
y
e
a
r

V
W

B
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A
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(
%
)

Quintiles based on difference in idiosyncratic volatility 1 year
before M&A
-40
-30
-20
-10
0
10
20
1 2 3 4 5
5
-
y
e
a
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E
W

B
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(
%
)

Quintiles based on difference in illiquidity 1 year before M&A
-40
-30
-20
-10
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10
1 2 3 4 5
5
-
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a
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V
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%
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Quintiles based on difference in illiquidity 1 year before M&A


38
Figure 5
BHARs of the SEO Firms by Differences in Firm Characteristics between the SEO Firms and Their Size- and
B/M-Matched Comparable Firms

This figure plots the equal- and value-weighted BHARs of the SEO firms. The SEO firms are grouped into quintiles
based on the differences in the average beta over the 12 months before the offering, cumulative return over months -
12 to -2 before the offering, average idiosyncratic volatility over the 12 months before the offering, and average
illiquidity over the 12 months before the offering, respectively, of the SEO firm and its size- and book-to-market-
ratio-matched comparable firm. At the end of the latest December before the offering, each bidder is matched with a
firm whose market capitalization is between 70% and 130 percent of the SEO firm and has the closest book-to-
market ratio. The sample has 5,573 bidders over the period 1980-2005. Beta is the monthly market beta estimated
using daily stock returns in each month. Momentum is the cumulative return over months -12 to -2 before the
offering. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama-
French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume.









-30
-20
-10
0
10
20
1 2 3 4 5
5
-
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e
a
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%
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Quintiles based on difference in beta 1 year before SEO
-60
-50
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1 2 3 4 5
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Quintiles based on difference in beta 1 year before SEO
-25
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Quintiles based on difference in momentum before SEO
-40
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1 2 3 4 5
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Quintiles based on difference in momentum before SEO
-20.00
-10.00
0.00
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20.00
1 2 3 4 5
5
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%
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Quintiles based on difference in idiosyncratic volatility 1 year
before SEO
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
1 2 3 4 5
5
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%
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Quintiles based on difference in idiosyncratic volatility 1 year
before SEO
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
1 2 3 4 5
5
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%
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Quintiles based on difference in illiquidity 1 year before SEO
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
1 2 3 4 5
5
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%
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Quintiles based on difference in illiquidity 1 year before SEO


39
Figure 6
BHARs of the IPO Firms by Differences in Firm Characteristics between the IPO Firms and Their Size-
Matched Comparable Firms

This figure plots the equal- and value-weighted BHARs of the IPO firms. The IPOs are grouped into quintiles based
on the differences in the average beta over the 12 months after the offering, cumulative return over months 1 to 11
after the offering, average idiosyncratic volatility over the 12 months after the offering, and average illiquidity over
the 12 months after the offering, respectively, of the IPO firm and its size- and book-to-market-ratio-matched
comparable firm. At the end of December after IPO, each IPO firm is matched with a firm with the closest but
greater market capitalization. The sample has 8,987 IPOs over the period 1980-2005. Beta is the monthly market
beta estimated using daily stock returns in each month. Momentum is the cumulative return over months 1 to 11
after the offering. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the
Fama-French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading
volume.








-60
-40
-20
0
1 2 3 4 5
5
-
y
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a
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B
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(
%
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Quintiles based on difference in beta 1 year after IPO
-150
-100
-50
0
1 2 3 4 5
5
-
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B
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(
%
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Quintiles based on difference in beta 1 year after IPO
-300
-200
-100
0
100
200
1 2 3 4 5
5
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Quintiles based on difference in momentum after IPO
-300
-200
-100
0
100
1 2 3 4 5
5
-
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%
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Quintiles based on difference in momentum after IPO
-120
-100
-80
-60
-40
-20
0
1 2 3 4 5
5
-
y
e
a
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E
W

B
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(
%
)

Quintiles based on difference in idiosyncratic volatility 1 year
after IPO
-150
-100
-50
0
50
1 2 3 4 5
5
-
y
e
a
r

V
W

B
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A
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(
%
)

Quintiles based on difference in idiosyncratic volatility 1
year after IPO
-100
-80
-60
-40
-20
0
1 2 3 4 5
5
-
y
e
a
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B
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%
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Quintiles based on difference in illiquidity 1 year after IPO
-150
-100
-50
0
1 2 3 4 5
5
-
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a
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V
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(
%
)

Quintiles based on difference in illiquidity 1 year after IPO


40
Figure 7
Distributions of BHARs and Difference in Monthly Log Return

This figure plots the distributions of the 60-month equal-weighted BHARs and the difference in monthly log returns
between the event firms and their matching firms. The corporate events include mergers and acquisitions, seasoned
equity offerings, and initial public offerings. Each bidding firm and SEO firm is matched with a control firm based
on size and B/M at the end of the December prior to deal completion. Each IPO firm is matched with a control firm
based on size at the end of the December after going public. BHARs are the differences in the cumulative buy-and-
hold returns over the 60-month period between the event firms and their matching firms. Difference in monthly log
return is the differences in monthly log returns between the event firms and their matching firms.

Bidding Firms


SEO Firms


IPO Firms


0
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0
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60-month BHARs
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Difference in Log Return
Distribution of Difference in Log Return
0
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D
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-60 -40 -20 0 20
60-month BHARs
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Difference in Log Return
Distribution of Difference in Log Return
0
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60-month BHARs
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Difference in Log Return
Distribution of Difference in Log Return


41
Table 1: Summary of Findings in the Related Literature

This table summarizes the empirical findings of selected previous studies on the long-run stock performance of
event firms after M&As, SEOs, and IPOs. These studies report the three- or five-year BHARs of the event firms
and/or the Jensens Alphas of monthly portfolios of the event firms. Superscript *** indicates that the BHAR or the
Alpha is statistically significant at the 1% level.

a
The authors did not report statistical significance level.
Author(s) Sample Sample Firm/deal Holding EW Alpha - Calendar
Period Size Type Period BHARs Time Portfolio
Panel A: M&As
Loughran and Vijh (1997) 1970-1989 385 Stock M&As 5 years -24.2%***

Loughran and Vijh (1997) 1970-1989 196 Cash M&As 5 years 18.5%

Loughran and Vijh (1997) 1970-1989 207 Mixed M&As 5 years -9.6%

Loughran and Vijh (1997) 1970-1989 788 All 5 years -6.5%

Rau and Vermaelen (1998) 1980-1991 2823 Mergers 3 years -4.04%

Rau and Vermaelen (1998) 1980-1991 316 Tender offers 3 years 8.85%
Moeller, Schlingemann, and Stulz
(2004) 1980-2001 12023 All 3 years

0.18%
Harford (2005) 1981-2000

All

0.25%
Betton, Eckbo, and Thorburn
(2008) 1980-2003 11483 All 5 years -21.9%*** 0.08%
Panel B: SEOs
Loughran and Ritter (1995) 1970-1990 3702 All 5 years -59.4%
a

Spiess and Affleck-Graves (1995) 1975-1989 1247 All 3 years -22.8%***

Jegadeesh (2000) 1970-1993 2992 All 5 years -34.3%*** -0.31%***
Brav, Geczy, and Gompers (2000) 1975-1992 3775 All 5 years -26.3%
a
-0.19%
Eckbo, Masulis, and Norli (2008) 1980-2000 4971 Industrial 5 years -29.7%*** -0.18%
Fu, Huang, and Lin (2012) 1980-2002 5062 All 3 years -12.67%*** -0.40%***
Fu, Huang, and Lin (2012) 2003-2010 1583 All 3 years -4.65% -0.19%
Panel C: IPOs
Loughran and Ritter (1995) 1970-1990 4753 All 5 years -50.7%
a

Brav, Geczy, and Gompers (2000) 1975-1992 3501 All 5 years 6.6%
a
-0.19%
Eckbo, Masulis, and Norli (2008) 1980-2000 5018 Industrial 5 years -18.0%*** -0.16%


42
Table 2: Number of Event Firms

This table presents the number of M&As, SEOs, and IPOs in our sample by year. Our samples of event firms are
retrieved from the SDC database.

Year M&A SEO IPO
1980 1 188 99
1981 9 197 262
1982 1 224 93
1983 0 518 589
1984 6 109 274
1985 76 172 265
1986 103 200 571
1987 101 134 444
1988 103 60 222
1989 116 112 195
1990 82 86 178
1991 117 263 366
1992 149 210 536
1993 190 308 694
1994 257 193 509
1995 343 293 513
1996 396 367 797
1997 391 296 536
1998 467 213 346
1999 379 228 503
2000 332 221 364
2001 233 175 94
2002 160 176 79
2003 177 204 70
2004 202 247 199
2005 188 179 189
Total 4579 5573 8987



43
Table 3: Percentiles of Differences in Firm Characteristics

This table presents the 10
th
90
th
percentiles of the differences in beta, momentum, idiosyncratic volatility and
illiquidity between the event firms and their size- and book-to-market-ratio-matched comparable firms. At the end of
the latest December before M&A (SEO), each bidder (SEO firm) is matched with a firm whose market
capitalization is between 70% and 130 percent of the bidder and has the closest book-to-market ratio. For each
bidder (SEO firms) and its matching firm, we calculate their market beta, illiquidity, and idiosyncratic volatility
using daily stock returns over the 12 months before the event. Beta is the monthly market beta estimated using daily
stock returns in each month. Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns
in the Fama-French three factor regression. Illiquidity is the average daily ratio of absolute stock return to dollar
trading volume. We then compute the average beta, illiquidity, and idiosyncratic volatility over the 12 months before
M&A (SEO) for the bidders (SEO firms) and their matching firms. Momentum is the cumulative return over months
-12 to -2 before M&A (SEO). At the end of December after IPO, each IPO firm is matched with a firm with the
closest but greater market capitalization. The 12-month average beta, illiquidity, and idiosyncratic volatility after
IPO are computed using the same method. Momentum for IPOs and their matching firms is the cumulative returns
over months 1 to 11 after the offering.


Percentiles Difference in
Beta Momentum Idio. volatility Illiquidity
Mergers and acquisitions
10th percentile -0.852 -0.675 -0.277 -1.923
20th percentile -0.491 -0.364 -0.139 -0.290
30th percentile -0.254 -0.179 -0.076 -0.050
40th percentile -0.096 -0.036 -0.024 -0.009
50th percentile 0.068 0.097 0.015 -0.001
60th percentile 0.239 0.238 0.059 0.000
70th percentile 0.422 0.402 0.111 0.003
80th percentile 0.670 0.631 0.187 0.047
90th percentile 1.088 1.191 0.318 0.677
SEOs
10th percentile -0.762 -0.490 -0.217 -1.091
20th percentile -0.429 -0.172 -0.118 -0.285
30th percentile -0.185 0.021 -0.059 -0.070
40th percentile 0.013 0.200 -0.011 -0.017
50th percentile 0.186 0.361 0.027 -0.003
60th percentile 0.353 0.529 0.071 0.000
70th percentile 0.537 0.764 0.117 0.006
80th percentile 0.791 1.070 0.174 0.042
90th percentile 1.159 1.762 0.273 0.275
IPOs
10th percentile -0.845 -0.913 -0.301 -4.763
20th percentile -0.478 -0.590 -0.148 -1.422
30th percentile -0.242 -0.385 -0.054 -0.461
40th percentile -0.050 -0.225 0.019 -0.109
50th percentile 0.139 -0.082 0.086 -0.009
60th percentile 0.328 0.068 0.151 0.006
70th percentile 0.544 0.237 0.231 0.051
80th percentile 0.833 0.444 0.330 0.250
90th percentile 1.259 0.798 0.481 1.212




44
Table 4: Impacts of Firm Characteristics on Long-run BHARs

This table presents the equal- and value-weighted BHARs of the event firms over the 60-months after the event.
Each event firm is matched with a comparable firm based on size and B/M. At the end of the latest December before
M&A (SEO), each bidder (SEO firm) is matched with a firm whose market capitalization is between 70% and 130
percent of the bidder and has the closest book-to-market ratio. For each bidder (SEO firms) and its matching firm,
we calculate their market beta, illiquidity, and idiosyncratic volatility using daily stock returns over the 12 months
before the event. Beta is the monthly market beta estimated using daily stock returns in each month. Idiosyncratic
risk is the annualized standard deviation of the residual daily stock returns in the Fama-French three factor
regression. Illiquidity is the average daily ratio of absolute stock return to dollar trading volume. We then compute
the average beta, illiquidity, and idiosyncratic volatility over the 12 months before M&A (SEO) for the bidders
(SEO firms) and their matching firms. Momentum is the cumulative return over months -12 to -2 before M&A
(SEO). At the end of December after IPO, each IPO firm is matched with a firm with the closest but greater market
capitalization. The 12-month average beta, illiquidity, and idiosyncratic volatility after IPO are computed using the
same method. Momentum for IPOs and their matching firms is the cumulative returns over months 1 to 11 after the
offering. Superscripts ***, **, and * correspond to statistical significance at the one, five, and ten percent levels,
respectively, for the t-test of the null hypothesis that BHAR = 0.

Panel A: BHARs of Bidding Firms
Mean Buy-and-Hold

Returns (%) Mean BHARs
Quintile N Bidders Matches EW VW
Based on difference in market beta 1 year before M&A
1 916 38.68 50.05 -11.37 -0.14
2 916 42.43 56.18 -13.75 -11.26***
3 915 47.71 61.85 -14.14 -15.82***
4 916 36.69 64.45 -27.76*** -21.29***
5 915 60.88 54.09 6.80 -36.21***
Based on difference in momentum 1 year before M&A
1 913 45.21 53.95 -8.74 -9.61***
2 912 40.14 62.79 -22.65*** -11.6***
3 912 45 60.17 -15.17* -7.07*
4 912 58.34 57.92 0.42 -14.60**
5 912 38.84 52.69 -13.85 -50.05***
Based on difference in idiosyncratic volatility 1 year before M&A
1 916 43.67 46.27 -2.60 -8.24
2 916 61.73 49.58 12.15 14.09**
3 915 71.48 61.81 9.67 -23.63***
4 916 32.92 65.92 -32.99*** -28.70***
5 915 16.58 63.07 -46.49*** -53.51***
Based on difference in illiquidity 1 year before M&A
1 916 32.42 61.91 -29.49*** -33.85***
2 915 42.55 60.62 -18.07 -4.17
3 916 30.5 48.81 -18.31** -20.93***
4 915 45.05 52.2 -7.14 -15.35***
5 915 76.01 62.91 13.09 4.74
Total 4579 45.28 57.31 -12.04* -17.16***



45
Panel B: BHARs of SEO Firms
Mean Buy-and-Hold

Returns (%) Mean BHARs
Quintile N SEOs Matches EW VW
Based on difference in market beta 1 year before SEO
1 1114 47.38 33.03 14.35** 5.67
2 1114 46.22 53.06 -6.84 -18.36***
3 1113 51.15 58.55 -7.40 -31.32***
4 1114 40.73 61.91 -21.17** -24.18***
5 1113 36.65 59.05 -22.39*** -47.50***
Based on difference in momentum 1 year before SEO
1 1112 39.43 38.02 1.41 -6.74
2 1112 48.53 68.68 -20.15*** -7.38*
3 1111 51.08 59.70 -8.63 -36.65***
4 1112 48.72 52.20 -3.48 -20.08***
5 1111 34.15 47.60 -13.45 -35.19***
Based on difference in idiosyncratic volatility 1 year before SEO
1 1114 46.62 27.88 18.75 16.81***
2 1114 45.09 52.47 -7.38 -24.49***
3 1113 49.84 63.56 -13.72** -12.07**
4 1114 46.27 60.70 -14.44** -31.97***
5 1113 34.31 60.99 -26.68*** -40.93***
Based on difference in illiquidity 1 year before SEO
1 1053 43.29 56.35 -13.07 -15.06*
2 1053 45.91 61.60 -15.69* -11.96
3 1053 43.67 57.90 -14.23** -25.01***
4 1053 40.32 50.77 -10.45* -12.07***
5 1053 49.26 36.17 13.08* -9.22
Total 5573 44.42 53.07 -8.65*** -19.55***




46
Panel C: BHARs of IPO Firms
Mean Buy-and-Hold

Returns (%) Mean BHARs
Quintile N IPOs Matches EW VW
Based on difference in market beta 1 year after IPO
1 1798 34.25 76.01 -41.75*** -24.49***
2 1797 32.67 87.75 -55.08*** -12.03**
3 1797 36.67 82.96 -46.28*** -37.16***
4 1797 44.32 88.05 -43.73*** -45.97***
5 1797 46.47 99.06 -52.59*** -104.81***
Based on difference in momentum 1 year after IPO
1 1762 -21.6 185.06 -206.66*** -189.92***
2 1761 -3.38 110.01 -113.39*** -99.82***
3 1762 17.92 65.21 -47.29*** -35.26***
4 1761 62.82 40.02 22.79*** 41.05***
5 1761 140.74 35.98 104.76*** 69.76***
Based on difference in idiosyncratic volatility 1 year after IPO
1 1798 45.43 54.02 -8.59 3.59
2 1797 62.26 83.52 -21.26* 10.02
3 1798 43.3 89.56 -46.25*** -13.83***
4 1797 51.68 101.65 -49.96*** -51.49***
5 1797 -8.37 105.07 -113.44*** -134.24***
Based on difference in illiquidity 1 year after IPO
1 1737 17.08 93.79 -76.71*** -127.24***
2 1736 47.33 95.15 -47.82*** -72.21***
3 1736 67.46 81.35 -13.89 -37.43***
4 1736 43.55 82.8 -39.25*** -76.94***
5 1736 21.55 69.77 -48.23*** -88.78***
Total 8987 38.86 86.76 -47.90*** -55.06***



47

Table 5: Summary Statistics of BHARs and Difference in Monthly Log Return

This table reports the summary statistics of the 60-month equal-weighted BHARs and the difference in log monthly
returns between the event firms and their matching firms. The corporate events include mergers and acquisitions,
seasoned equity offerings, and initial public offerings. Each bidding firm and SEO firm is matched with a control
firm based on size and B/M at the end of the December prior to deal completion. Each IPO firm is matched with a
control firm based on size at the end of the December after going public. BHARs are the differences in the
cumulative buy-and-hold returns over the 60-month period between the event firms and their matching firms.
Difference in monthly log return is the differences in monthly log returns between the event firms and their
matching firms.

M&As SEOs IPOs
Variable 60-month Difference in 60-month Difference in 60-month Difference in
BHARs log return BHARs log return BHARs log return
Mean -0.120 -0.004 -0.086 -0.003 -0.479 -0.012
Std. Dev. 4.452 0.227 2.414 0.212 4.402 0.246
Skewness 27.243 -0.151 -2.244 -0.162 5.206 -0.225
Kurtosis 1365.070 11.684 69.223 11.179 489.452 9.361
Minimum -62.446 -4.057 -49.73 -4.014 -123.778 -3.739
p5 -3.058 -0.352 -2.903 -0.327 -4.616 -0.396
p25 -0.815 -0.107 -0.802 -0.105 -1.431 -0.129
Median -0.050 -0.002 -0.005 0.000 -0.323 -0.007
p75 0.675 0.100 0.698 0.102 0.510 0.111
p95 2.545 0.336 2.46 0.317 3.252 0.359
Maximum 220.954 2.933 26.073 3.292 188.708 2.708



48
Table 6: Explaining Differences in Stock Returns between Event Firms and Their Matching Firms

This table presents the OLS/Fama-MacBeth regression results for the difference in the log monthly returns of the event firm and its size- and B/M-matched
comparable firms. Each event firm is matched with a comparable firm based on size and B/M. For mergers and acquisitions and SEOs, each event firm is
matched with a firm whose market capitalization is between 70% and 130% of the event firm and has the closest book-to-market ratio at the end of the latest
December before the event. At the end of December after IPO, each IPO firm is matched with a firm with the closest but greater market capitalization. Market
beta for July of year t to June of year t+1 is estimated with the monthly stock returns in years t-5 to t-1 using the market model. Size is the market capitalization
at the end of the latest June. B/M is defined as the ratio of the book value of common equity at the end of fiscal year t-1 to the market value of common equity at
the end of the latest June. Momentum is the cumulative return over months -12 to -2. Idiosyncratic risk is the annualized standard deviation of the residual daily
stock returns in the Fama-French three factor regression in month -2. Illiquidity for July of year t to June of year t+1 is computed as the average daily ratio of
absolute stock return to dollar trading volume from July of year t-1 to June of year t divided by the market average illiquidity over the same period, as defined by
Amihud (2002). For each of the six firm characteristics (beta, size, B/M, momentum, illiquidity, and idiosyncratic volatility), we compute the difference between
the event firm and its size-and B/M-matched comparable firm. In every month over our sample period, the positive differences in each firm characteristic are
ranked and normalized to be its percentile ranking. All negative differences are ranked and normalized to be one minus its percentile ranking. Consequently, the
normalized differences in each firm characteristics take a value from -1 to 1, with 0 corresponds to the difference in firm characteristic that is the closest to 0.
Panels A1, B1, and C1 report the pooled-OLS regression results for our M&A, SEO, and IPO samples respectively; Panels A2, B2, and C2 report the Fama-
MacBeth regression results. All model specifications employ robust standard errors. The associated t-statistics are reported in the parentheses below each
coefficient. Superscripts ***, **, and * correspond to statistical significance at the one, five, and ten percent levels, respectively.




49
Panel A1: Mergers and Acquisitions Pooled OLS Regressions
(1) (2) (3) (4) (5) (6) (7)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0023 -0.0025

(-0.806) (-0.885)
Normalized difference in size

-0.0011

(-0.637)
Normalized difference in B/M

0.0046**

(2.276)
Normalized difference in momentum

0.0125***

(3.017)
Normalized difference in illiquidity

0.0085*** 0.0080*** 0.0064***

(3.664) (3.647) (3.080)
Normalized difference in idiosyncratic
volatility

-0.0210*** -0.0206*** -0.0176***

(-4.629) (-5.179) (-4.541)
Constant -0.0042*** -0.0042*** -0.0042*** -0.0042*** -0.0026*** -0.0025*** -0.0027***

(-7.924) (-7.213) (-4.206) (-4.234) (-3.260) (-3.278) (-3.356)
Cluster by M&A deal No Yes No No No No No
Cluster by date No No Yes Yes Yes Yes Yes
Observations 179,799 179,799 179,799 166,579 179,633 175,175 166,579
Adjusted R-squared 0.000 0.000 0.000 0.000 0.003 0.003 0.004




50
Panel A2: Mergers and Acquisitions Fama-MacBeth Regressions
(1) (2) (3) (4)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0046 0.0052

(-1.421) (0.556)
Normalized difference in size

-0.0007

(-0.186)
Normalized difference in B/M

-0.0091

(-1.017)
Normalized difference in momentum

0.0095

(1.197)
Normalized difference in illiquidity

0.0057* 0.0038 0.0146

(1.697) (1.092) (1.544)
Normalized difference in idiosyncratic
volatility

-0.0221*** -0.0211*** -0.0225**

(-6.836) (-6.257) (-2.113)
Constant -0.0029*** -0.0022** -0.0015 0.0054

(-3.116) (-2.471) (-1.255) (0.947)
Observations 179,799 179,633 175,175 166,579
Adjusted R-squared 0.000 0.061 0.087 0.149



51
Panel B1: SEOs Pooled OLS Regressions
(1) (2) (3) (4) (5) (6) (7)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0040 -0.0036

(-1.564) (-1.426)
Normalized difference in size

-0.0015

(-0.791)
Normalized difference in B/M

0.0032*

(1.928)
Normalized difference in momentum

0.0129***

(3.851)
Normalized difference in illiquidity

0.0044** 0.0036** 0.0031*

(2.330) (2.047) (1.768)
Normalized difference in idiosyncratic
volatility

-0.0206*** -0.0195*** -0.0170***

(-5.896) (-6.350) (-5.563)
Constant -0.0025*** -0.0025*** -0.0025** -0.0034*** -0.0007 -0.0006 -0.0008

(-5.802) (-5.123) (-2.104) (-2.717) (-0.707) (-0.682) (-0.943)
Cluster by M&A deal No Yes No No No No No
Cluster by date No No Yes Yes Yes Yes Yes
Observations 233,942 233,942 233,942 208,474 226,896 219,902 208,474
Adjusted R-squared 0.000 0.000 0.000 0.000 0.003 0.003 0.004




52
Panel B2: SEOs Fama-MacBeth Regressions
(1) (2) (3) (4)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0013 -0.0009

(-0.478) (-0.406)
Normalized difference in size

-0.0002

(-0.135)
Normalized difference in B/M

0.0043**

(2.331)
Normalized difference in momentum

0.0124***

(4.902)
Normalized difference in illiquidity

0.0048*** 0.0071** 0.0045**

(2.638) (1.997) (1.979)
Normalized difference in idiosyncratic
volatility

-0.0204*** -0.0226*** -0.0191***

(-7.999) (-5.867) (-9.164)
Constant -0.0016 -0.0005 -0.0018 -0.0010

(-1.339) (-0.490) (-0.891) (-0.954)
Observations 233,942 226,896 219,902 208,474
Adjusted R-squared 0.000 0.026 0.040 0.069




53
Panel C1: IPOs Pooled OLS Regressions
(1) (2) (3) (4) (5) (6) (7)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0011 -0.0015

(-0.392) (-0.480)
Normalized difference in size

-0.0011

(-0.413)
Normalized difference in B/M

0.0079***

(4.018)
Normalized difference in momentum

0.0196***

(4.344)
Normalized difference in illiquidity

0.0133*** 0.0106*** 0.0087***

(5.787) (4.000) (3.331)
Normalized difference in idiosyncratic
volatility

-0.0321*** -0.0291*** -0.0232***

(-6.087) (-6.190) (-4.605)
Constant -0.0116*** -0.0116*** -0.0116*** -0.0097*** -0.0074*** -0.0055*** -0.0044***

(-31.580) (-27.033) (-4.973) (-3.903) (-4.565) (-3.868) (-2.991)
Cluster by M&A deal No Yes No No No No No
Cluster by date No No Yes Yes Yes Yes Yes
Observations 447,839 447,839 447,839 193,868 387,874 246,087 193,868
Adjusted R-squared 0.000 0.000 0.000 0.000 0.005 0.004 0.005




54
Panel C2: IPOs Fama-MacBeth Regressions
(1) (2) (3) (4)
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0021 -0.0059

(-0.386) (-1.033)
Normalized difference in size

-0.0010

(-0.297)
Normalized difference in B/M

0.0072***

(3.280)
Normalized difference in momentum

0.0208***

(5.996)
Normalized difference in illiquidity

0.0090*** 0.0068 0.0067

(3.143) (1.362) (1.634)
Normalized difference in idiosyncratic
volatility

-0.0301*** -0.0285*** -0.0190***

(-4.508) (-5.977) (-4.768)
Constant -0.0090*** -0.0077*** -0.0038* -0.0024

(-4.698) (-3.166) (-1.835) (-1.152)
Observations 447,839 387,874 246,087 193,868
Adjusted R-squared 0.000 0.042 0.055 0.089



55
Table 7: Explaining Differences in Stock Returns between Event Firms and Their Matching Firms: Nonlinear Relations

This table presents the OLS/Fama-MacBeth regression results for the difference in the log monthly returns of the event firm and its size- and B/M-matched
comparable firms. Each event firm is matched with a comparable firm based on size and B/M. For mergers and acquisitions and SEOs, each event firm is
matched with a firm whose market capitalization is between 70% and 130% of the event firm and has the closest book-to-market ratio at the end of the latest
December before the event. At the end of December after IPO, each IPO firm is matched with a firm with the closest but greater market capitalization. Market
beta for July of year t to June of year t+1 is estimated with the monthly stock returns in years t-5 to t-1 using the market model. Size is the market capitalization
at the end of the latest June. B/M is defined as the ratio of the book value of common equity at the end of fiscal year t-1 to the market value of common equity at
the end of the latest June. Momentum is the cumulative return over months -12 to -2. Idiosyncratic risk is the annualized standard deviation of the residual daily
stock returns in the Fama-French three factor regression in month -2. Illiquidity for July of year t to June of year t+1 is computed as the average daily ratio of
absolute stock return to dollar trading volume from July of year t-1 to June of year t divided by the market average illiquidity over the same period, as defined by
Amihud (2002). For each of the six firm characteristics (beta, size, B/M, momentum, illiquidity, and idiosyncratic volatility), we compute the difference between
the event firm and its size-and B/M-matched comparable firm. In every month over our sample period, the positive differences in each firm characteristic are
ranked and normalized to be its percentile ranking. All negative differences are ranked and normalized to be one minus its percentile ranking. Consequently, the
normalized differences in each firm characteristics take a value from -1 to 1, with 0 corresponds to the difference in firm characteristic that is the closest to 0. All
model specifications employ robust standard errors. The associated t-statistics are reported in the parentheses below each coefficient. Superscripts ***, **, and *
correspond to statistical significance at the one, five, and ten percent levels, respectively.




56
(1) (2) (3) (4) (5) (6)
Event M&A SEO IPO
Method OLS
Fama-
MacBeth OLS
Fama-
MacBeth OLS
Fama-
MacBeth
Dependent variable Difference in Log Return
Normalized difference in market beta -0.0024 -0.0121 -0.0036*** -0.0019 -0.0012 -0.0011

(-0.831) (-1.344) (-3.899) (-0.715) (-0.432) (-0.544)
Normalized difference in market beta^2 -0.0046** 0.0023 0.0004 -0.0016 -0.0003 0.0004

(-2.155) (0.286) (0.227) (-0.602) (-0.094) (0.152)
Normalized difference in size -0.0015 0.0013 -0.0011 0.0001 -0.0011 -0.0005

(-0.869) (0.310) (-1.198) (0.071) (-0.417) (-0.159)
Normalized difference in size^2 -0.0034 -0.0286 -0.0062*** -0.0020 -0.0014 -0.0033

(-1.221) (-1.239) (-3.404) (-0.609) (-0.310) (-1.205)
Normalized difference in B/M 0.0042** 0.0059 0.0030*** 0.0038** 0.0079*** 0.0074***

(2.137) (0.770) (3.000) (1.990) (4.077) (3.042)
Normalized difference in B/M ^2 -0.0000 0.0154** -0.0009 0.0059 -0.0058* -0.0007

(-0.005) (2.186) (-0.502) (0.696) (-1.719) (-0.206)
Normalized difference in momentum 0.0124*** 0.0147* 0.0129*** 0.0111*** 0.0195*** 0.0186***

(3.003) (1.844) (13.696) (3.734) (4.310) (6.257)
Normalized difference in momentum^2 -0.0011 -0.0134 0.0026 0.0068** -0.0061* 0.0042

(-0.433) (-1.315) (1.461) (2.335) (-1.667) (1.478)
Normalized difference in illiquidity 0.0063*** 0.0120** 0.0035*** 0.0045* 0.0087*** 0.0064*

(3.016) (2.096) (3.414) (1.705) (3.331) (1.891)
Normalized difference in illiquidity^2 -0.0028 -0.0134 -0.0017 -0.0037 0.0020 -0.0040

(-0.901) (-0.968) (-0.781) (-0.986) (0.580) (-1.178)
Normalized difference in idiosyncratic volatility -0.0176*** 0.0032 -0.0169*** -0.0179*** -0.0226*** -0.0210***

(-4.555) (0.146) (-16.810) (-7.676) (-4.804) (-6.898)
Normalized difference in idiosyncratic
volatility^2 -0.0054* -0.0040 -0.0008 -0.0005 -0.0040 -0.0050*

(-1.840) (-0.602) (-0.385) (-0.150) (-0.868) (-1.813)
Constant 0.0030 0.0144 0.0014 -0.0018 0.0007 -0.0022

(1.342) (1.278) (1.092) (-0.917) (0.192) (-0.705)

Observations 166,579 166,579 208,474 208,474 193,868 193,868
Cluster by date Yes No Yes No Yes No
Adjusted R-squared 0.004 0.212 0.004 0.095 0.006 0.109


57
Table 8: Explaining Differences in Stock Returns between Event Firms and Their Matching Firms: Match at
the Event Time

This table presents the OLS/Fama-MacBeth regression results for the difference in the log monthly returns of the
event firm and its size- and B/M-matched comparable firms. Each event firm is matched with a comparable firm
based on size and B/M. Each M&A and SEO firm is matched with a firm whose market capitalization is between 70%
and 130% of the event firm and has the closest book-to-market ratio at the end of the month prior to the completion
of the acquisition or equity offering. Market beta for July of year t to June of year t+1 is estimated with the monthly
stock returns in years t-5 to t-1 using the market model. Size is the market capitalization at the end of the latest June.
B/M is defined as the ratio of the book value of common equity at the end of fiscal year t-1 to the market value of
common equity at the end of the latest June. Momentum is the cumulative return over months -12 to -2.
Idiosyncratic risk is the annualized standard deviation of the residual daily stock returns in the Fama-French three
factor regression in month -2. Illiquidity for July of year t to June of year t+1 is computed as the average daily ratio
of absolute stock return to dollar trading volume from July of year t-1 to June of year t divided by the market
average illiquidity over the same period, as defined by Amihud (2002). For each of the six firm characteristics (beta,
size, B/M, momentum, illiquidity, and idiosyncratic volatility), we compute the difference between the event firm
and its size-and B/M-matched comparable firm. In every month over our sample period, the positive differences in
each firm characteristic are ranked and normalized to be its percentile ranking. All negative differences are ranked
and normalized to be one minus its percentile ranking. Consequently, the normalized differences in each firm
characteristics take a value from -1 to 1, with 0 corresponds to the difference in firm characteristic that is the closest
to 0. All model specifications employ robust standard errors. The associated t-statistics are reported in the
parentheses below each coefficient. Superscripts ***, **, and * correspond to statistical significance at the one, five,
and ten percent levels, respectively.

Panel A: Mergers and Acquisitions
(1) (2) (3) (4)
Method OLS OLS OLS
Fama-
MacBeth
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0024 -0.0035

(-0.839) (-1.223)
Normalized difference in size

-0.0015 -0.0028

(-0.825) (-0.948)
Normalized difference in B/M

0.0043** 0.0033

(2.409) (0.938)
Normalized difference in momentum

0.0126*** 0.0109***

(2.992) (3.082)
Normalized difference in illiquidity

0.0034* 0.0029

(1.685) (0.594)
Normalized difference in idiosyncratic
volatility

-0.0165*** -0.0176***

(-4.063) (-3.855)
Constant -0.0045*** -0.0045*** -0.0034*** -0.0011

(-8.429) (-4.406) (-4.017) (-0.885)

Cluster by date No Yes Yes No
Observations 187,652 187,652 170,659 170,659
Adjusted R-squared 0.000 0.000 0.003 0.147







58
Panel B: SEOs
(1) (2) (3) (4)
Method OLS OLS OLS
Fama-
MacBeth
Dependent variable Difference in Log Return
Normalized difference in market beta

-0.0026 -0.0025

(-1.146) (-1.165)
Normalized difference in size

-0.0013 -0.0016

(-0.716) (-0.913)
Normalized difference in B/M

0.0028* 0.0030**

(1.918) (2.253)
Normalized difference in momentum

0.0126*** 0.0125***

(3.662) (4.954)
Normalized difference in illiquidity

0.0042*** 0.0043***

(2.599) (2.613)
Normalized difference in idiosyncratic
volatility

-0.0192*** -0.0189***

(-6.131) (-9.827)
Constant -0.0017*** -0.0017 -0.0004 0.0000

(-4.037) (-1.531) (-0.421) (0.014)

Cluster by date No Yes Yes No
Observations 251,245 251,245 218,776 218,776
Adjusted R-squared 0.000 0.000 0.004 0.062