Reverse Event Study

A reverse event study is a type of event study that examines the impact of an event on the stock price and performance of firms that are not directly involved in the event. Reverse event studies are often used to monitor stocks for spillover effects of events that originate from sources other than the firm. Examples of such events include mergers and acquisitions of rivals, broader market events.

Reverse event studies follow the same basic steps as traditional event studies, but they focus on the stock price and performance of firms that are not directly involved in the event. Specifically, reverse event studies involve the following steps:

• Identify a sample of firms that are not directly involved in the event.
• Collect data on the stock price and performance of the firms before and after the event.
• Calculate abnormal returns (AR) and abnormal volume (AV) for the firms around the event. Abnormal returns measure the difference between the actual stock returns and the expected returns, based on a statistical model such as the Capital Asset Pricing Model (CAPM). Abnormal volume measures the deviation of trading volume from the expected level.
• Test for statistical significance of the abnormal returns and abnormal volume using appropriate statistical tests.
• Analyze the results to determine the impact of the event on the stock price and performance of the firms that are not directly involved in the event.

Reverse event studies can be used to study the spillover effects of events on the performance of firms in related industries, firms that compete with firms involved in the event, or firms that are in the same geographic region as firms involved in the event. Reverse event studies have been used in a variety of contexts, including mergers and acquisitions, antitrust investigations, and environmental regulations.