A Generalized Method for Detecting Abnormal Returns and Changes in Systematic Risk

We generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Our method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. We use our approach to study 123 banks that acquired other institutions between 1989 and 1995. We find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods