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On the use of event studies to evaluate economic policy decisions: A note of caution

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  • Haji Ali Beigi, Maryam
  • Budzinski, Oliver

Abstract

Event studies represent an increasingly popular method to evaluate (future) welfare effects of economic policy decisions. The basic idea is to hire the stock market as a referee, i.e. that stock market reactions to the announcement of policy decision are interpreted to contain superior information about the (future) welfare effects of these decisions. This paper investigates the degree of reliability of event studies as a policy programs evaluation method by critically reflecting upon two underlying assumptions. Since both the information superiority and efficiency of financial markets and, in particular, the conclusion from abnormal returns to (future) economic welfare effects consist of considerable interpretation problems, we issue a note of caution: scientists and policymakers should be very reluctant to rely on stock market reactions as a referee on economic policy decisions. Event studies cannot replace thorough theory-driven economic analysis.

Suggested Citation

  • Haji Ali Beigi, Maryam & Budzinski, Oliver, 2012. "On the use of event studies to evaluate economic policy decisions: A note of caution," Ilmenau Economics Discussion Papers 80, Ilmenau University of Technology, Institute of Economics.
    • Handle: RePEc:zbw:tuiedp:80
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    1. Budzinski, Oliver, 2012. "Impact evaluation of merger control decisions," Ilmenau Economics Discussion Papers 75, Ilmenau University of Technology, Institute of Economics.

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    More about this item

    Keywords

    event studies; abnormal returns; economic policy evaluation; regional free trade agreements; merger control decisions; IMF supported programs;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H00 - Public Economics - - General - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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