Which of the following are good candidates for ascertaining the value effects with an event study, and why?
1. An acquirer wants to buy the firm.
2. The CEO dies
3. The CEO ages
4. Positive earnings surprise at the annual meeting
5. Purchase of a new machine
6. A law is passed to force the company to reduce its emissions
7. An ad campaign
To determine which events are good candidates for ascertaining value effects with an event study, we need to consider the characteristics of an event that make it suitable for analysis. Event studies aim to examine the impact of specific events on a firm's value, usually by measuring changes in stock prices or other financial indicators. Here's an analysis of each event mentioned:
1. An acquirer wants to buy the firm: This event can be a suitable candidate for an event study. Generally, the announcement of a potential acquisition can lead to a significant change in a firm's value, as it often involves a change in ownership and potential future cash flows.
2. The CEO dies: This event could be a suitable candidate for an event study. The death of a CEO can have implications for a company's future leadership and strategic decisions, which may impact its value. However, the magnitude of the effect may depend on various factors, such as the CEO's importance to the company and the existence of a succession plan.
3. The CEO ages: This event is less likely to be a good candidate for an event study. The process of CEO aging is gradual and often well-known to investors, making it less likely to generate a sudden impact on the firm's value that can be easily attributed to the event itself.
4. Positive earnings surprise at the annual meeting: This event is a suitable candidate for an event study. Positive earnings surprises, which exceed analysts' expectations, can lead to significant changes in a company's stock price. It indicates better-than-expected financial performance and can boost investor confidence and valuation.
5. Purchase of a new machine: This event is less likely to be a good candidate for an event study. The purchase of a new machine is typically part of a company's regular operations and may not generate a significant event with identifiable value effects.
6. A law is passed to force the company to reduce its emissions: This event can be a suitable candidate for an event study. Regulatory changes can have a significant impact on a firm's operations, costs, and overall value. Investors may react to the potential financial consequences of complying with new regulations, resulting in changes in market value.
7. An ad campaign: This event may or may not be a good candidate for an event study. The effectiveness of an ad campaign in influencing a company's value can be difficult to quantify and separate from other factors. However, if the campaign is specific, substantial, and has a clear impact on public perception or market demand, it may be suitable for analysis.
In conclusion, the events that are generally good candidates for ascertaining value effects with an event study are an acquirer's interest in buying the firm, positive earnings surprises, laws or regulations affecting the company, and potentially impactful ad campaigns. The death of a CEO can also be considered, depending on the circumstances and relevance of the CEO to the company. The CEO aging and regular purchase of a new machine are less likely to generate clear and significant value effects.