What is an event study designed to test?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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An event study is designed to test a hypothesis about the relationship between some event and financial markets.  It is important for people whose jobs and fortunes depend on predicting things like future trends in stock prices.

An event study might seek to understand, for example, the likely impact of a tax increase on the share price of a firm or firms.  The person conducting the event study would need to look at previous instances of similar tax increases.  They would then need to look at how share prices of that firm (or firms) behaved around the time of the tax increase.  Finally, they would need to be sure to take into account other factors to ensure that it was really the tax increase that caused the change (or lack thereof) in share prices.   

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