Patties Food Limited very recently made a structural change in its organizational hierarchy. It announced, on September 23, 2008, that it was changing its CEO and was appointing a non-executive director . Structural changes and changes in CEO can often create panic. The case for Apple is one of the most supporting evidences for this statement: Steve Jobs’ break from the position of the CEO saw a substantial decrease in the share price of Apple’s stock. However, on the date under consideration, Patties Food Limited’s stock position was as follows: Open: $1. 14 High: $1. 14 Low: $1. 00 Close: $1. 05
Volume Traded: 259,099 As can be seen from the above statistics, PFL is a low-priced stock with major variations being in terms of cent changes in the stock prices. The event study methodology here seeks to identify whether the change in the stock price was significant after the “event” took place. The following graph shows the stock price variation for Patties Food Limited from May 23, 2008 to May 24, 2009. Preliminary observations suggest that there was a gradual dip in the stock price till the end of October for a one-month period. The lowest price was on October 17, 2009 at $0. 88 per share.
After recovering for a period of 2 weeks (approximately) the share again nosedived and on November 24, 2008 stood at a new low of $0. 75 per share. To analyze these changes the event study methodology techniques have to be applied. Event Study Methodology Financial and economics literature extensively uses the event study methodology to analyze company stock performances. McWilliams and Siegel (1997) have defined event study methodology as a technique that ‘determines whether there is an abnormal stock price effect associated with an unanticipated event’, from the event study, ‘the researcher can infer the significance of the event’.
Basic Assumptions: Although there are several assumptions in the application of this technique, the major ones include: ? The event should not have been foreseen/predicted i. e. there should be no expectation of the event occurring in the future. ? The stock price changes are entirely affected by the event. Entirely is a very strong word in financial assumptions. It cannot always be assumed that an outcome was caused entirely due to an event’s occurrence. However, for the scope of the event study methodology, this assumption has to be made.
? The event occurs in isolation of any other event within the time horizon of importance. For example, the structural change at Patties Foods Limited was the only major event that can be found in the history of the company for a twelve month range. Since event study methodology is applied to a wide range of time period, no other event should influence the stock performance during that time period. Otherwise the effect of the event tends to be eclipsed. ? The market is assumed to be efficient meaning that the stock performance and price changes reflect entirely the news and changes happening within the company.
For example, a poor communication system would mean that the news of major changes in the company would not reach the shareholders and their purchasing behavior would be unchanged. Efficient markets perform and respond to real-time changes. The Cumulative Abnormal Return (CAR) is a calculation derived from Market Method Methodology to examine the influence of the decision to re-structure the hierarchy at Patties Food Limited. The following table shows the various time periods that need to be analyzed.