Endogenous Events and Long Run Returns

We analyze event abnormal returns when returns predict events. In …xed samples we show that the expected abnormal return is negative and becomes more negative as the holding period increases. Asymptotically, abnormal returns converge to zero provided that the process of the number of events is stationary. Non-stationarity in the number of events process is needed to generate a large negative bias. We present theory and simulations for the speci…c case of a lognormal model to characterize the magnitude of the small sample bias. We illustrate the theory by analyzing long-term returns after IPOs and SEOs.