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An Investigation of Market Microstructure Impacts on Event Study Returns

Authors

  • RONALD C. LEASE,

  • RONALD W. MASULIS,

  • JOHN R. PAGE

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    • The University of Utah, Vanderbilt University, and Tulane University, respectively. We wish to thank the participants at the finance workshops at Arizona State University, University of Arizona, Brigham Young University, University of Colorado-Boulder, University of Pittsburgh, Rutgers University, University of South Florida, University of Texas-Austin, UCLA, University of Utah, Vanderbilt University, and VPI for their helpful comments. We especially wish to thank Yakov Amihud, Sanjai Bhagat, James Brickley, Judy Lease, David Mayers (editor), Michael Ryngaert, and an anonymous referee for their suggestions. Funding from the Freeman Institute at Tulane, the James M. Collins Professorship of Finance at SMU, and the Garn Institute of Finance at the University of Utah supported this research.

ABSTRACT

We investigate the importance of bid-ask spread-induced biases on event date returns as exemplified by seasoned equity offerings by NYSE listed firms. We document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature. Buy-sell order flow imbalance is prominent around the offering and induces a relatively large spread bias. If order imbalances are suspected, the researcher can use returns calculated from the midpoint of the closing bid and ask quotes instead of returns calculated from closing transaction prices to avoid this return bias.

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