Misspecification in event studies

We examine the statistical error and efficiency associated with two commonly used event-study techniques when applied to samples of various sizes. Previous research has established that the frequently used Patell (1976) test is not well specified when the event itself creates additional return variance. We find that even under ideal conditions when the event creates no additional variance, the Patell test rejects a true null hypothesis substantially more often than the stated significance level. In contrast, the alternate test of Boehmer et al. (1991) performs well in samples of all sizes and under all conditions we consider.