Problem 7-1: Thorogood Enterprises Announcement On November

Problem 7-1 On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. (Negative values should be indicated by a minus sign.

On November 14, Thorogood Enterprises announced the resolution of a public and contentious battle with its CEO, who agreed to step down immediately in exchange for a severance package. The task is to determine the cumulative abnormal return (CAR) around this announcement date, assuming that the company's expected return is equal to the market return. The provided data includes daily market return percentages and company return percentages around the event date, along with the number of days from the announcement and the corresponding abnormal returns.

Paper For Above instruction

The determination of the impact of corporate announcements on stock prices often involves calculating abnormal returns, which reflect the difference between actual returns and expected returns derived from market performance. In this case, the focus is on the announcement made by Thorogood Enterprises on November 14 concerning the resignation of its CEO, and how this event affected the company's stock price compared to market expectations.

Data Overview: The dataset includes daily market returns and individual company returns, spanning several days around the announcement. The data points provided are as follows: for each date, the market return (%) and the company's return (%), along with the number of days from the announcement and the daily abnormal returns. The key task is to aggregate these abnormal returns over the event window to obtain the CAR, which indicates whether the stock experienced abnormal gains or losses attributable to the announcement.

Methodology: Since the expected return is assumed to be equal to the market return, the abnormal return (AR) for each day is calculated as follows:

AR = Company's Return - Market Return

The cumulative abnormal return (CAR) is then obtained by summing the individual abnormal returns over the relevant window—commonly several days before and after the event to capture market anticipation and reaction.

For this analysis, the data must be carefully processed: the abnormal returns for each day are calculated, ensuring no cell is left blank (assigning zero where necessary). Once the daily ARs are computed, the CAR is the sum of those ARs within the specified event window.

Results Interpretation: A positive CAR indicates that the stock performed better than expected around the event, implying a favorable market perception of the CEO's resignation. Conversely, a negative CAR suggests the event was perceived unfavorably, leading to poorer-than-expected stock performance.

Conclusion: The calculation of CAR provides valuable insight into investors' reaction to corporate events. By applying this methodology to Thorogood Enterprises' announcement, analysts can assess whether the market reacted positively or negatively to the CEO's resignation, aiding in investment decision-making and understanding market sentiment surrounding corporate governance changes.

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