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“Bryan its market. So let s talk about event studies. Now basically an event study study is a way of trying to look at how much value is being created in this case by mergers and acquisitions and it basically works on the idea that when you ve got a takeover being announced the acquiring share price will change to reflect how much value the market believes that takeovers going to create so if the market believes. The takeover will create value acquire a share price will increase.

If the market belief. The takeover is going to destroy value the acquire a share price is going to decrease the events that he tries to capture 20×10 has that price shifted now in particular we re going to focus on short term event studies. These are event studies that look at short term price movements around the announcement of a major event in this case in that position and we re going to look at of how would you go about calculating what the market s reaction. Is and what does it actually tell us that is what can be really infer from how the market is responding around the announcement of a takeover.

Offer and in particular. We re going to focus on the acquire a share price and the reason for doing. This is when you ve got a target. The target share price always increases in almost all cases.

This is of course. The target can expect to get a take of a premium and the share price will increase the extent to which the market believes. The deal will actually commit summated and the premium will be received the acquirer. However isn t always so lucky and in some cases.

The acquire a share price might decline now. Let s have a look at how you would go about looking at this event. Study and calculating as the acquire share price increased or decreased particularly after you take account of fact. There are different acquires will have different levels of market exposure.

All right so event studies basically involve getting the sum or the product of the firm s abnormal returns over an event period. The abnormal return is basically a return earned by that firm that isn t simply attributable to general market movements now when we sum all these returns together. We get this thing called the timberland abnormal return or the cop. Which is basically the accumulation of all the abnormal returns from the first place so t1 through until the final day being t2 typically that will be from say two days before the takeover announcement to say two days after the takeover announcement for a five day takeover.

Abnormal return well can also do over eleven days or any other number of potentially. But this will represent the total amount of the abnormal returns over that of memory so basically the total amount of the returns. Who would not simply be attributable to ordinary market conditions all right so with this in mind let s look at what abnormal returns. Actually are because there are a core part of this accumulate version or more advanced.

Now. Then basically the return that isn t a simply a trivial to general market movements. So we re trying to get it well if you ve got a firm and a firm is sensitive to market movements. It s clearly going to experience a return on that a mentor at what the market is doing.

But we want to look at well how is that firms return moved other than simply due to general market movements as what has been the impact of say the takeover on the firm s returns on a given day or not to get at this i really need to do is firstly predict well what would that ordinary return be now it turns out the ordinary return isn t just the market return. The ordinary return also needs to take account of two things. A the firm s recent track record. That is as conducted by say.

The folks alpha over the short term period. Before the takeover. Announcement. And also be the firm s general sensitivity and responsiveness to general market movements.

So they would be denoted by the firm s beta. So in order to do this we need to follow through four main steps firstly. We would obtain the funds are for a beta by using a regression model basic way this works is we take the firmus returns on a given day. We take the market index returns in a given day.

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And then we run a regression over say trading year before the takeover. Announcement. Now clearly because there can be some lead up to the tech of pronouncement. So some anticipation need to take this takeover.

You and this revere rather from say ten days before the takeover announcement. It s off so for example we look at a trading year up until 10 days before the takeover. An asura with them run a regression and we get the alpha and beta from this regression. Representing both aid.

The firm s general level performance. So in the alpha and also the firm sensitivity and responsiveness of market movements. Now. The next thing.

We can do is we can take that alpha beta and apply it to data from during the event through so during the event period. The market index will obviously keep generating returns just as the firm will be generating returns. So what we can do is you get the firm s predicted. Return.

The ridiculous is going to equal the first alpha plus. The market index return multiplied by the firm s bidder representing how sensitive and responsive other firms returns to the general market movements. We can then obtain the abnormal work. Though the alcohol return is basically the difference between the firm s actual return and the predicted return so the return you would be predicting.

If the firm simply had been following general market movements on that day as if a takeover announcement had never occurred in forth. We can sum these abnormal returns over the aplan period. We should give us the cumulative abnormal return so we can do this from say. Two days before the takeover announcement to do this after say three days for four to three days after five days before the five days after any number of permutations of that type of takeover period.

We can look at okay. So let s have a look at how it might actually go about getting this cumulative abnormal returns and we ll do this in excel. Now. It s best to do this with an example so here s one example now there s a company called clean away is listed on the australian stock exchange.

I it announced to take over for another australian company called tox free solutions. Now the deal was announced on the 11th of december in 2017 and the doors consummated by may 2018. Now. What we really want to look at is well how did the market respond to this takeover announcement in order to do this we re going to look at cleaner ways takeover announced for returns.

So we re going to look at the acquirers returns and we ll see did the market respond positively or negatively to this takeover announcement. In this particular case and we ll do this using excel and data attributable to clean away all right so. The first thing. We re going to want to do is we re going to want to get cleaner.

Ways our for a beta. So what i have here is basically a set of price data obtained from yahoo finance and from the price data which is in the first two columns here from the price data. We can get the returns both to clean away. Which is cwy here and also to the market index.

Which is the all ordinaries market index for the for australia now in these columns over here that i m pointing to we have the returns that are earned on a daily basis. Now what these returns in mind. What we can do is you can calculate the alpha and the beta for cleanaway now the way we do this is by using the offer of beta functions in so alright. So.

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What we need to do is we need to look at this over say. The course of a trading year from say. Ten days before the takeover announcement. So this was basically implied that would go from say the 30th of november in 2016.

Through to the 30th of november in 2017 or there are baths. So let s look at the alpha first now i can do this using say an excel function such as the intercept function. Now the reason. The intercept function.

Works is because the alpha is basically the intercept in a regression model. So we get the intercept function unknown y. s are going to be the returns to clean away over the course of this trading year so we ll go from here 30th of november in 2016. And i ll go through until say the 30th november in 2017 now also unknown x.

s that s going to be the market index returns. So it s pretty much the same thing as with sake cleaner ways returns again from the 30th of november through to the 30th of november in 2017. This will enable us to calculate an intercept term. So we ll end up with an alpha.

It s quite close to zero. Which is not terribly surprising of course. Any given firm in general terms is going to have a very small offer of course. An equilibrium firms can to earn a large offer for any extended period of time.

We can also get the firmest beta. Now this we become using. Say the slope function and x. All.

This is because the beta is effectively a slope function. When you re taking a regression of the firm s returns onto returns of the market. So again. We ll use the slope function and we ll use again unknown.

Y s being the returns to clean away. And we ll use as unknown x s the returns on the all ordinaries index. So we can see how this works right here. So unknown at what x s other terms of the all ordinaries index.

Which would be the factors that we re thinking going to influence cleaner ways returns on any given. Day. So what we can see here is our intercept is about 11. 4.

So the firm s beer is a little bit above 1. Getting a sensitivity responsiveness. The general market movements would probably be somewhere. That s a little bit greater than 1.

Suggesting is a little bit more responsive to market movements than the general firm all right so what we re going to need to do is get the firm s abnormal returns. Now the abnormal return it to remember is basically return the firm gets that is over and above the return on the ordinary market index so return that isn t a trip at all to general market movements so to get this what we do is we can do this for all of the returns that are earned throughout the life of the firm. But we re most interested in the firm s returns over the event period. Now if it all sort of purposes are short for the full set of returns that we have for cleanaway in this example all right so to get this let s start by getting the firm s predicted return.

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Predict don t turn is going to be the firm s offer. Which represents any degree of over performance during that period. Again is very close to zero. Which is exactly what you would expect then you also need to add on the market index return.

Which represents what happens if ordinary market conditions of the system. But in cleanaway space the bid is just above one according to our aggression model over this time period so need to multiply the market index return be better to represent that additional sensitive and responsiveness. The cleaner way has to market index. Returns so the better here is about 11.

For now say in our initial day. That gives us a abnormal. Return i ll sorry a predicted return arrived about 13. Percent.

Now that it s off is not meaningful. Because we re only really interested in the abnormal returns and interest in those particularly during the period. Where we ve got the takeover announcement natha less let s get this predictor returns. Whole life period of returns that we have in our example.

Here all right so if these predicted returns in mind. What we can then do is we can say look at well. What s the funds abnormal return. Do we might get now the admin return is basically firms return less the predictor return.

So positive abnormal return is generally seen as a good thing and negative abnormal return is generally seen as a negative thing all right so in our first aid the abnormal return is going to be quite positive in this case for 32. Percent. But again that s not that relevant to the takeover announcement. In question.

What we re most interested in is the abnormal return or up the takeover. All right so we ve met these abnormal turns throughout the whole life period. Now that gives us a set of abnormal returns that we can then sum up to get cumulative abnormal times. Now you ll notice that we might want cumulative abnormal turns around an event period.

So for example you might want the cumulative abnormal return from two days before to two days after the takeover announcement or from five days before to five days after the takeover announcement. The reason we re taking into account returns before and after the announcement is sometimes there s a leakage of information. So we might want to take into account returns. Before the announcement also some takeovers can be quite complex so this reason it can take the market some time to digest.

All of the information. She might even incorporate return information up to five days after the takeover announcement. So let s go about summing these abnormal returns. So we need to look at what what s the abnormal returns that are happening around the takeover.

Announcement. Now here highlighted in yellow is the takeover announcement. Bit so if we re going to get the five day takeover in our return. We need to highlight all five days throughout the takeover announcement to get the sum of these days.

But this enable us to sum up well what s the determinant of abnormal turn around that takeover period. We can also do this he ll say the five day takeover and ask for a return as well so let s take the sum of the returns from two days before to two days after the takeover announcement in this. Case we ve been end up with the sum of probably about 73. Percent.

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Now. That s generally quite a positive return. It s they re suggesting this takeover is creating quite a bit of value at least in that initial time period. We can look at this over a slightly larger time period as well.

Which will give us patterson slightly broader perspective on whether this tag of is going to create value so let s sum up those returns as well and see what s happening in this case. So we sum up all of these returns. The positive effect is perhaps. Even more marked is going up to even say 10 percent in this case.

Suggesting the market genuinely seems to think at least in the short term this take of is going to create value for cleanaway suggesting. The market is responding very positively to this takeover announcement. All right so this gives you an idea of how to calculate abnormal returns over an event period for a takeover announcement. Well let s think about some things we need to bear in mind now the first thing to bear in mind is the event period.

So we need to incorporate pre event information and post event information. That is when getting the cumulative abnormal returns. We also sum up returns from before the takeover announcement. Our returns from after the take of our announcement day this is in order to incorporate any leakage of information that can sometimes occur before the takeover announcement or just in the anticipation.

There might be some event occurring. We incorporate post announcement information in order to take kind of the fact the market might not fully digest all information immediately. So we might need to take into account a couple of days after the announcement actually occurs the next thing we need to bear in mind is that sometimes additional information to just come along at a later date so for example. There might be additional information about the takeover that occurs a few weeks later this can always make the analysis.

A little bit more tricky and this sort of leads us to the idea. We might do to a full long term evaluation of the takeover. Rather than just a short term evaluation in order to cross validate. What we re looking at next thing.

We need to do is be mindful of confounding events. So these are events that my messy. The results so for example the firm omega takeover. But it might also release earnings information that means that the information you re a cooperating might be a little bit muddy.

So you might be reflecting earnings information as opposed to just the takeover information if there s that type of confining event now sometimes a more complex model is also necessary so when we re getting these abnormal returns. This is relying us getting a model for predicting what returns would be in ordinary market conditions if the firm is very thinly traded for example a more complex model might be necessary in some cases who might want to use something like a farmer frames free model or a carhartt four factor model. If we re going to say both full evaluation of taker manaslu returns often however this simple ordinary least squares regression using an ordinary market model will be sufficient especially for quite liquid firms and then finally we might need to consider long term returns both in terms of long term stock price returns and long term operating performance get a full evaluation of how this takeover is performed and naturally we re going to just look at the short term and ask for returns. It has some major advantages major advantage is a give us an idea partner market is immediately responded of course.

The disadvantage is it doesn t fully incorporate all of the information about the takeover and sometimes takeovers can turn out to be quite good and the market might underestimate or overestimate. The synergies from a deal if we re simply just looking at the short term market reaction. That said however long term returns and absolves have their own problems. They can however for example being punished by other subsequent events that come along that might muddy those results make them less reliable so both short term returns and long term returns have their own advantages and disadvantages nevertheless.

I hope this talk has been useful to you in terms of getting an idea how you d go about calculating cumulative abnormal returns yourself. Particularly when using excel and i hope. It s been useful to you in terms of the understanding or cumulative abnormal returns. Not short term enansal returns.

Tell you and how to calculate them so thanks for you so much for listening to me. And i ll see you next ” ..

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