Question: Selecting a public company for analysis, collecting relevant data, and reviewing literature.

a) Selecting a public company for analysis, collecting relevant data, and reviewing literature. 

You must select a single public company satisfying the following criteria:

• The nature and dates of at least four significant (preferably related) information events occurring over a relatively short period of time (not more than eight months) can be identified.
• Three years of continuous daily stock price data, beginning at least two years before the first information event and ending not less than three months after the final information event, are available for analysis.

b) Performing appropriate analysis of the impact of multiple information events on the stock returns of a public company

In order to focus solely on the impact of firm-specific information on stock returns, a control is needed to model daily returns conditionally expected from contemporaneous non-firm-specific information. The market model should be used as the control. 

Suitable tests for coefficient stability, and for the validity of the Ordinary Least Squares assumptions, should be conducted, and appropriate modifications made to the estimated model as necessary. The final estimated model can then be used to calculate prediction errors (abnormal returns) in the event windows.

The report should describe the nature of the information events for your chosen company, the hypotheses you tested, any problematic data issues you encountered (such as treatment of capitalisation changes, rights issues, dividends, suspension of trading etc) and how they were handled, your research design, interpretation of results and your conclusions.

DRAFT / STUDY TIPS

Part 1: Selecting a Public Company for Analysis

Selected Company: Tesla, Inc. (TSLA)

Information Events

Event 1: Battery Day Announcement

• Date: September 22, 2020
• Nature: Tesla held its annual Battery Day event, where it unveiled plans for new battery technology and manufacturing processes, promising significant cost reductions and performance improvements.

Event 2: Q3 2020 Earnings Release

• Date: October 21, 2020
• Nature: Tesla reported its Q3 2020 financial results, highlighting record deliveries and profitability.

Event 3: S&P 500 Inclusion Announcement

• Date: November 16, 2020
• Nature: S&P Dow Jones Indices announced that Tesla would be added to the S&P 500 index, effective December 21, 2020.

Event 4: S&P 500 Inclusion

• Date: December 21, 2020
• Nature: Tesla was officially included in the S&P 500 index.

Data Availability

Three years of daily stock price data are available for Tesla, starting from January 1, 2018, to March 31, 2021. This period covers two years before the first event (Battery Day Announcement) and extends three months beyond the final event (S&P 500 Inclusion).

Part 2: Analysis of the Impact of Information Events on Stock Returns

Methodology

1. Data Collection

• Stock Price Data: Daily closing prices for Tesla from January 1, 2018, to March 31, 2021.
• Market Index Data: Daily closing prices for a relevant market index (e.g., S&P 500) for the same period to serve as a control in the market model.

2. Market Model Specification

The market model relates the return of the stock to the return of the market index as follows:

𝑅𝑖,𝑡=𝛼𝑖+𝛽𝑖𝑅𝑚,𝑡+𝜖𝑖,𝑡Ri,t​=αi​+βi​Rm,t​+ϵi,t​

where:

• 𝑅𝑖,𝑡Ri,t​ is the return of Tesla stock on day 𝑡t
• 𝑅𝑚,𝑡Rm,t​ is the return of the market index on day 𝑡t
• 𝛼𝑖αi​ and 𝛽𝑖βi​ are the model parameters
• 𝜖𝑖,𝑡ϵi,t​ is the error term

3. Stability and Validity Tests

• Coefficient Stability: Check for changes in the model parameters over time.
• OLS Assumptions: Test for linearity, homoscedasticity, independence, and normality of residuals.

4. Event Study Methodology

• Estimation Window: Use a pre-event period to estimate the market model parameters.
• Event Window: Define a short period around each event date to capture the immediate impact.
• Abnormal Returns (AR): Calculate the difference between actual returns and predicted returns from the market model.
• Cumulative Abnormal Returns (CAR): Sum the abnormal returns over the event window to measure the overall impact.

Hypotheses

1. Battery Day Announcement:

   • H0: The Battery Day announcement has no impact on Tesla's stock returns.
   • H1: The Battery Day announcement has a significant impact on Tesla's stock returns.

2. Q3 2020 Earnings Release:

   • H0: The Q3 2020 earnings release has no impact on Tesla's stock returns.
   • H1: The Q3 2020 earnings release has a significant impact on Tesla's stock returns.

3. S&P 500 Inclusion Announcement:

   • H0: The S&P 500 inclusion announcement has no impact on Tesla's stock returns.
   • H1: The S&P 500 inclusion announcement has a significant impact on Tesla's stock returns.

4. S&P 500 Inclusion:

   • H0: The S&P 500 inclusion has no impact on Tesla's stock returns.
   • H1: The S&P 500 inclusion has a significant impact on Tesla's stock returns.

Research Design

1. Data Collection: Download daily stock prices for Tesla and the S&P 500 index.
2. Market Model Estimation: Estimate the parameters 𝛼𝑖αi​ and 𝛽𝑖βi​ using the pre-event period.
3. Event Window Analysis: Calculate abnormal returns and cumulative abnormal returns around each event date.
4. Hypothesis Testing: Conduct statistical tests to determine the significance of abnormal returns.

Interpretation of Results

• Positive Abnormal Returns: Indicates a favorable market reaction to the event.
• Negative Abnormal Returns: Indicates an unfavorable market reaction to the event.
• Insignificant Abnormal Returns: Suggests the event had no discernible impact on stock returns.

Conclusion

The analysis will provide insights into how each significant event impacted Tesla's stock returns and whether these impacts were statistically significant. This can inform investors about the sensitivity of Tesla's stock to firm-specific news and events.

Next Steps

1. Data Collection and Cleaning: Gather and clean the necessary stock price and market index data.
2. Estimation and Testing: Perform the market model estimation, stability tests, and OLS assumption checks.
3. Event Study Execution: Calculate abnormal returns and conduct hypothesis testing for each event.
4. Report Writing: Compile the findings into a comprehensive report, including data issues, methodology, results, and conclusions.

By following this structured approach, we will be able to systematically analyze the impact of significant events on Tesla's stock returns, providing valuable insights for investors and researchers alike.