Modelling Normal Returns in Event Studies: A Model-Selection Approach and Pilot Study†

The choice of model of normal returns in event studies has been widely discussed in the literature. While researchers frequently continue to use an array of alternatives, there is currently some tendency to favour cruder but simpler meanor marketadjusted returns models. This paper presents a general-to-specific model selection framework for testing the data admissibility of the principal models in current use. Results from a pilot study yield useful insights and indicate a strong preliminary preference in favour of the regression-based models, with the market model generally outperforming the capital asset pricing model. *Professor of Economics, Department of Economics, University of Wales, Aberystwyth **Lecturer and ICAEW Research Fellow, Department of Accounting and Finance, University of Wales, Aberystwyth †The authors are grateful to Jasbir Sandhu for computing assistance