Trading Frequency and Event Study Test Specification

We examine the effects of thin trading on the specification of event study tests. Simu-lations of upper and lower tail tests are reported with and without variance increases on the event date across levels of trading volume. The traditional standardized test is mis-specified for thinly traded samples. If return variance is unlikely to increase, then Cor-rado’s rank test provides the best specification and power. With variance increases, the rank test is misspecificed. The Boehmer et al. standardized cross-sectional test is properly specified, but not powerful, for upper-tailed tests. Lower-tailed alternative hy-potheses can best be evaluated using the generalized sign test.