A Study on Cross-Sectional Dependence and Independence Approach in an Event Study- A Case with SENSEX

Abstract

Purpose: The objective of the study is to make a comparative analysis of the result of an event study on the effect of quarterly earnings announcement on stock returns of firms constituting SENSEX. The comparative study is pursued by incorporating cross sectional dependence adjustment as well cross sectional independence adjustment, side-by-side, in the estimation of standard deviation of Average Abnormal Return (AAR). Methodology: Event study methodology using daily returns and market model has been used for the present study. The variance of AAR has been computed under cross sectional dependence as well cross-sectional independence approaches. Findings: The study reveals that the result of an event study analysis under cross sectional dependence adjustment and cross sectional independence adjustment, has largely been similar. Research Limitations: The present study involves study of the firms listed in BSE SENSEX. The effect of the quarterly earnings announcement with reference to firms listed in other indices, if covered, may provide different sets of results. Value: The paper identifies the significance of cross sectional dependence adjustment as well as cross-sectional independence adjustment in the event study analysis of quarterly earnings announcement.

Keywords: Event Study, BSE-SENSEX, Quarterly Earnings Announcements, Cross Sectional Dependence Approach and Cross Sectional Independence Approach

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