Professor Vineet Bhagwat EVENT STUDY ANALYSIS OF DIVIDEND CUTS
HOMEWORK 2
Individual Assignment. Although you may discuss data sources and methods with others, the write
up and analysis should be your own work. Events:
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The following five companies announced dividend cuts on the following days: GE (13 November, 2017) Permno: 12060
Pearson (18 January, 2017) Permno: 88595
Mattel (26 October, 2017) Permno: 39538
Mosaic Co. (31 October, 2017) Permno: 90386 Conoco Phillips (4 February, 2016) Permno: 13928
Use the date in parenthesis as the event date. Your job is to examine whether the announcement of the dividend cut produces significant abnormal returns.
I. Estimation stage:
Let the estimation window be from -273 to -22 trading days prior to each event
Obtain daily stock returns from WRDS.
Obtain daily factor returns for the Fama-French (1993) factors (Mkt-Rf, SMB, HML) and
risk-free rates (RF) for the same period from:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
Obtain the normal (K) and abnormal stock returns for each company over the estimation window, using the 3 Fama-French factors (Mkt, SMB, HML)
Report the estimated betas (with t-stats) for the 3 factor model for each company/event.
Are any of the betas significant?
II. Event window:
Calculate the abnormal returns for each stock and aggregate them over the event window for the 3- factor model: Calculate CAR(0,+3) and its t-statistic over trading days 0, +1, +2, and +3 (L=4 days)
That is, for each day (0, +1, +2, and +3), calculate the AR over all five companies (see slides in Lecture 1). So you should have one number for AR for each day.
Then cumulate this AR over the four days to obtain the CAR and t-stat. III. Summary of Results and Conclusions
1. Upload the excel file to the link I send
2. Describe the event study and results in a separate word document with the following
sections and upload to the link:
a. Summary: a brief summary of the events – 1 paragraph.
FINA6278 Professor Vineet Bhagwat
b. Hypothesis: briefly describe what you expect CARs to be when a dividend is cut based on the existing literature discussed in class. Note: this will be different for different theories
c. Data: identify the sample period, the source of the data, the specific variable used, and any transformations to the data.
d. Experiment: Describe the specific steps of your experiment from the data to the final numbers on CAR. Report the betas from the estimation window in a table.
e. Summary table: Report the results in a table f. Discussion of results:
i. Did the stock price have a significant reaction to the announcement?
ii. What does this tell you about the various theories of dividends and repurchases
and their predictions?
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