The Relationship between Event Studies Approach and the Future Reaction of Stocks Prices: An Applied Study in the Saudi Market Stocks

Abstract

This research aims to measure the relationship between event studies approach and the future reaction of stocks prices, this research depends on three hypothesises:

1. "There is a strong relationship between the issued information about a certain event and the future prices of stocks".

2. "There is a strong relationship between the market efficiency and the events which effect the future prices of stocks".

3. "We can measure the reaction of the future prices of stocks towards the event by measuring the positive or negative abnormal returns".

To achieve the purpose of the research and to test its hypothesises the researcher review 19 previous studies about event studies and how to use it in measuring the reaction of stocks prices in the strong form of market efficiency, in the semi - strong form of market efficiency and in weak form of market efficiency.

The applied study was completed on 52 corporations which their stocks alternate in the Saudi Market to determine the events of these companies during the period from January 1, 2006 to June 30, 2008 which were 107 events, 72 of them were financial transactions and 35 of them were non- financial transactions. The financial transactions divided into 5 groups, the event of announcing cash dividends, the event of announcing stock dividends, the event of announcing stock splits, the event of announcing the issuing of financial statements and the event of announcing the increase in capital. The non- financial transactions divided into 2 groups, the event of announcing the change in board of directors and the event of alternative informal news in the market.

The researcher determined the stocks closed prices in the day of occurred each event through two event windows (-1, +1), (-10, +10), and calculated the forecasting prices by using the auto-regressive integrated moving average (ARIMA) to measure the actual return, the expected return and to determine the cumulative abnormal return and use the sample (Z) to analysis the results of every window and to illustrate its effect in the Saudi Market. The statistics results emphasize the correct of the three hypothesises.