PREFACE: EMPIRICAL CORPORATE FINANCE Judging by the sheer number of papers reviewed in this Handbook, the empirical analysis of firms’ financing and investment decisions—empirical corporate finance—has become a dominant field in financial economics. The growing interest in everything “corporate” is fueled by a healthy combination of fundamental theoretical developments and recent widespread access to large transactional data bases. A less scientific—but nevertheless important—source of inspiration is a growing awareness of the important social implications of corporate behaviour and governance.
This Handbook takes stock of the main empirical findings to date across the entire spectrum of corporate finance issues, ranging from econometric methodology, to raising capital and capital structure choice, and to managerial incentives and corporate investment behaviour.
The surveys are written by leading empirical researchers that remain active in their respective areas of interest. With few exceptions, the writing style makes the chapters accessible to industry practitioners. For doctoral students and seasoned academics, the surveys offer dense roadmaps into the empirical research landscape and provide suggestions for future work. Part 1 (Volume 1): Econometric Issues and Methodological Trends The empirical corporate finance literature is progressing through a combination of large sample data descriptions, informal hypothesis testing, as well as structural tests of theory. Researchers are employing a wide spectrum of econometric techniques, institutional settings, and market structures in order to distil the central message in the data. Part 1 of Volume 1 begins by reviewing econometric issues surrounding event studies, and proceeds to explain the econometrics of self-selection.
It then explains and illustrates methodological issues associated with the growing use of auction theory, and it ends with a discussion of key elements of the corporate finance evidence from a behavioural perspective. In Chapter 1, “Econometrics of event studies”, S.P. Kothari and Jerold Warner review the power of the event-study method; the most successful empirical technique to date for isolating the price impact of the information content of corporate actions.
The usefulness of event studies arises from the fact that the magnitude of abnormal performance at the time of an event provides a measure of the (unanticipated) impact of this type of event on the wealth of the firms’ claimholders. Thus, event studies focusing on announcement effects over short horizons around an event provide evidence relevant for understanding corporate policy decisions. Long-horizon event studies also serve an important purpose in capital market research as a way of examining market efficiency. The ix x Preface:
Empirical Corporate Finance survey discusses sampling distributions and test statistics typically used in event studies, as well as criteria for reliability, specification and power. While much is known about the statistical properties of short-horizon event studies, the survey provides a critical review of potential pitfalls of long-horizon abnormal return estimates. Serious challenges related to model specification, skewness and cross-correlation remain. As they also point out, events are likely to be associated with return-variance increases, which are equivalent to abnormal returns varying across sample securities. Misspecification induced by variance increases can cause the null hypothesis to be rejected too often unless the test statistic is adjusted to reflect the variance shift. Moreover, the authors emphasize the importance of paying close attention to specification issues for nonrandom samples of corporate events.
