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Institute
STUDIES HAVE FOCUSED ON INNOVATIONS IN VARIOUS CONTEXTS BUT LARGELY EXCLUDED FINANCIAL INNOVATIONS, DESPITE THEIR NOTABLE IMPORTANCE. THIS STUDY ANALYZES THE TYPES OF FINANCIAL INNOVATIONS BY MAJOR BANKS AND THEIR PAYOFFS. THE RESULTS INDICATE THAT SECURITY AND CREDIT INSTRUMENTS CONSTITUTE THE MOST COMMON FINANCIAL INNOVATIONS. THE AVERAGE RETURNS TO A FINANCIAL INNOVATION ARE $146 MILLION. IN ADDITION, RADICALNESS AND FINANCIAL RISKINESS INCREASE THE RETURNS, WHEREAS COMPLEXITY DECREASES THEM.
Most event studies rely on cumulative abnormal returns, measured as percentage changes in stock prices, as their dependent variable. Stock price reflects the value of the operating business plus non-operating assets minus debt. Yet, many events, in particular in marketing, only influence the value of the operating business, but not non-operating assets and debt. For these cases, the authors argue that the cumulative abnormal return on the operating business, defined as the ratio between the cumulative abnormal return on stock price and the firm-specific leverage effect, is a more appropriate dependent variable. Ignoring the differences in firm-specific leverage effects inflates the impact of observations pertaining to firms with large debt and deflates those pertaining to firms with large non-operating assets. Observations of firms with high debt receive several times the weight attributed to firms with low debt. A simulation study and the reanalysis of three previously published marketing event studies shows that ignoring the firm-specific leverage effects influences an event study's results in unpredictable ways.