Please advise if my calculation are correct from the excel file. The word file are the questions that were asked.
Event Study and Market Efficiency
Use the market model estimates of residual returns on IBM to determine whether the stock market reacts in an efficient way to earnings announcements. The data that is provided is based on actual closing prices for both IBM and for the NYSE composite index (Market Index). IBM announced its quarterly earnings for the quarter ending 9-94 on 10-21-94 (event day = 0). The actual earnings were $1.18/share. Analysts had forecast quarterly earnings of $0.90/share (the analyst forecast is the average of forecasts by 19 analysts). The returns on IBM and the market index from the 10 days before the earnings announcement through 5 days after the announcement is given in a spreadsheet.
1. Calculate the abnormal return and the cumulative abnormal return for the event days -10 through +5 for IBM. Assume that the return on IBM is generated by the following market model:
2. Plot the cumulative abnormal returns (vertical axis) against event day (horizontal axis).
3. Based on your results in parts 1 and 2, answer the following questions. For each question provide a brief explanation justifying your answer.
Is there any evidence inconsistent with weak form market efficiency? Could you have "made money" on date 0 or date 1 with a trading rule based on the past (date -10 through date 0) pattern of stock returns?
How does the market react to the earnings announcement? Is there evidence inconsistent with semi-strong form market efficiency? Provide 2 plausible explanations for what you observe, one that is consistent and one inconsistent with semi-strong form efficiency.
Is there any evidence that informed agents were trading before the announcement?