earnings per share, I/S method, stocks--Rate of return


To measure abnormal stock returns of a sample of firms in an event study, we often use matching firm adjusted returns where returns of the control firms are subtracted from the raw returns of the sample firms. In most financial studies, the control firms are selected by matching industry and size (the I/S method). That is, for each sample firm, a matching firm with the closest market capitalization within the same 3-digit Standard Industry Classification (SIC) code is selected. In this study, an alternative control firm selection method based on earnings per share (the EPS method) is compared to the traditional method. The EPS method matches each sample firm with a control firm that has the same EPS for a given fiscal year. While the mean matching firm adjusted returns provided by the two methods are close to the expected value of zero, the size of variances of the adjusted returns is somewhat smaller for the I/S method, showing some superiority for the traditional matching method based on industry and size.

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