Sample selection and event study estimation

The anomalies literature suggests that pricing is biased systematically for securities grouped by certain characteristics. If these characteristics are related to selection in an event study sample, imprecise predictions of an event study method may produce erroneous results. This paper performs simulations to compare a battery of short-run event study prediction and testing methods where samples are grouped by market equity, prior returns, book-to-market, and earnings-to-price ratios. Significant statistical errors are reported for both standard and newer methods, including three- and four-factor models. A characteristic-based benchmark model produces the least biased returns with the least rejection errors in all samples.