Modelling normal returns in event studies: a model-selection approach and pilot study

The choice of model of normal returns in event studies has been widely discussed in the literature. While researchers frequently continue to use an array of alternatives, there is currently some tendency to favour cruder but simpler mean- or market-adjusted returns models. This paper presents a general-to-specific model selection framework for testing the data admissibility of the principal models in current use. Results from a pilot study indicate a strong preliminary preference in favour of the regression-based models, with the market model generally outperforming the capital asset pricing model.