Event study Deals Stock Prices Additional Financials In this manual we will explain how to get data for the purpose of an event study. While we do describe the steps in the data collection process, we do not explain how the databases themselves work. For an explanation on the databases we refer to the manuals available on the EDSC website. In an event study you want to see whether the market reacts to a particular event, these events could range from a new law that has passed to M&A transactions. In this manual we use the example of an event study on M&A deals, because it requires the combination of at least two databases. To do an event study on M&A deals we need to collect three types of data. First we need to find the events, in this example these are the M&A deals. Second we need to download the stock prices of the companies involved in the deals and we need the price of at least one market index. By collecting stock data of the companies and the price of the market index before and around the deal date we can calculate cumulative) abnormal returns. Third we may want to do a regression analysis on the cumulative abnormal returns (CARs) to see which characteristics (of the industry, company, or period) can explain the returns. To perform this regression analysis we need to collect additional data on for example the companies involved. Furthermore to perform such an analysis we will need to merge the data from the different databases.
Step 1 Collecting your deals Databases: ThomsonOne - Zephyr The EDSC offers several databases that contain M&A deals. The most widely used databases are ThomsonOne and Zephyr (manuals). The decision to choose one over the other should be based on your research question or personal preference. It, however, does not matter for the event study. To create your deal sample you need to impose some search criteria. For an event study you could think of the following criteria. First, make sure that the target and/or acquirer is publicly listed. If they are not publicly listed then you cannot collect stock prices, thus performing an event study is not possible. Second, the acquired stake might be of interest. In the acquisition of a publicly listed company a commonly used threshold is a final stake of at least 30% after the deal (but not before), while for private companies this threshold is set at 50%. To impose such a restriction you will need to think about the allowed initial/acquired/final stake. For example if you are interested in acquisitions of private companies by publicly listed companies you could set the following criteria 1 : 1. Acquired stake is at least 50.01% 2. Initial stake is less than 50% 3. Final stake is at least 50.01%. Then set the following Boolean search (ignoring other criteria for now): 1 OR (2 AND 3) The final set of criteria will depend on your research question. Therefore you will need to think about these criteria carefully and discuss them with your supervisor. For example think about the region, countries, size of the companies involved, industries (maybe exclude financial), etc. After you have set all the criteria and you are ready to create your report you will need to add identifiers. This step is of great importance, because we need the identifiers to find stock data in step 2: ThomsonOne: If you use ThomsonOne for your deal collection make sure to add the SEDOL code and/or the Datastream code of the target and acquirer. You can find these by manually searching for them when creating your report. Zephyr: If you use Zephyr for your deal collection make sure to add the ISIN number and/or the BvD ID number of the target and acquirer. You can find the ISIN number under Company > Stock Data when creating your report. The BvD ID number can be found under Company > Contact details. Furthermore in both databases it is important to add the announcement date and the completion date of the deal as variables. 1 Additionally you could decide to download all deals and add the variables initial -, acquired -, and final stake to your dataset. Then afterwards you can filter your deals using these variables.
Step 2 Collecting stock prices Databases: Request Table Eventus Event Study Tool In the second step we are going to download the stock prices in order to calculate the CARs. The biggest difficulty with downloading stock prices for M&A deals is that all deals happen at different dates in time. Therefore we need to download stock prices for time periods relative to the event dates, which is the announcement date or the completion date depending on your research question. If you are familiar with programming in statistical software (Matlab, Stata, R, etc.) then you could also download stock prices for the full period and align the dates and calculate CARs afterwards. However do note that if your period covers many years and a lot of deals this could become very data intensive. For that reason we advise the other methods discussed below. There are several ways to approach the problem of relative dates. The first method is to download the stock prices manually via the Datastream Request Table 2. This option will require more work than the other options, but also offers more flexibility. By using this option you will only get the stock prices for the specified period. All calculations to get CARs have to be done afterwards. In the output, all dates are nicely aligned. The second option is only available for US data and is called Eventus (manual). Eventus provides quite some flexibility. The tool automatically downloads the stock prices, calculates cumulative abnormal returns, and offers statistical tests on the outcomes. A drawback however is that the stock prices and abnormal returns will not be delivered in the output, only the CARs and statistics are delivered. Finally, the third option is to use the EDSC Event Study Tool (manual). It offers the least flexibility, but is very easy to use and can be used for both US- and non-us stock prices. Your output will contain the abnormal returns and by a simply summing these you can get the CARs. For most event studies this method is sufficient. Method Database Required effort Flexibility Output Request Table Datastream Medium High Stock Prices Eventus CRSP (US Only) Low Medium CAR Statistical Tests Event Study Tool Datastream Low Low Stock Prices and Abnormal Returns Bloomberg Excel Bloomberg High High Stock Prices Add-in using functions 3 For all three methods it is necessary to have company identifiers and the announcement or completion date from step 1. Finally you will need to specify a market index. 2 Note: EDSC does not offer a manual on the request table. Our advice is to follow video tutorials, which can be easily find via Google. Search for Event Study with Datastream. 3 If you are familiar with the Bloomberg Excel Add-in than you can choose to create functions, which can download the stock prices for relative periods for the specified companies.
Step 3 Additional Financials Databases: Datastream (Worldscope) - Compustat Bloomberg Orbis Financials of companies are available in many databases at the EDSC (manuals). However do note that all databases differ in the available financials. For a discussion see the overview of the most important differences in the EDSC manual. You could use the following table to assist you in your decision: Database Period Coverage Private Comments Companies? Compustat 1970 - US and No - North America present Canada Compustat 1970 Global (excl. No - Global present US and Canada) Datastream ( Worldscope) 1980 - present Global Yes Works easy with ThomsonOne deal data Orbis 1990 - present Global Yes Works well with Zephyr deal data. Strong coverage of small/medium sized private companies. Major drawback: can only download financials for the 10 most recent years. To download the data from one of the databases you can upload the list of identifiers from step 1 into the databases. Then choose the financials that you want and start the download. For the specific steps please see the database specific manuals.
Step 4 Merging data from databases (example) After we have collected the financials we will want to merge the deal information with the CARs and the financials. That way we can run a regression analysis. Hence we have to merge the data from all three steps. The key to merging data from different databases is the company identifier. However the required effort will also depend on the software that you will use and your specific research question. For our purposes we will explain how to merge data with Excel and how to merge data with Stata. Do note that in some cases you may want to divert from these methods. We will explain the process of merging data with an example. Please be aware that the following example is only used as an illustration for this manual and does not represent a real research question: In this example we are interested in the effect of cash holdings of target companies on the stock prices of Dutch acquiring companies for deals from 2010-2014. 4 For this given example we will make use of the following databases 5 : Database Zephyr Event Study Tool Orbis Reason Deals CARs Financials Zephyr Deals See the figure below for the search strategy in Zephyr. Understand why some criteria have been set and others have not. Now to go View list of deals to create your custom report. In this report you need to add at least the following variables: - Target ISIN number - Target BvD ID number - Acquirer ISIN number - Acquirer BvD ID number - Announced date 4 Could have used Dutch Stock Exchange 5 The decision for these databases is specific to this illustration.
I added both the ISIN number and BvD ID number to show in the following steps how one or the other can be used. The date of announcement is added, because it is necessary for the calculations of the CARs. Additional variables that might be interesting for your research question should be added as well. For example (non-exhaustive list): Variable Initial - / Acquired - / Final Stake Deal Status Completion date Target - / Acquiror NACE rev.2 code Target - / Acquiror country code Reason If you want to use different thresholds you could also download all deals (without the percentage of stake criteria) and set the thresholds yourself afterwards. You could then set a threshold of 30% for public targets and 50% for private targets. If you are interested in a subset of completed deals. If you are interested in the market reaction around the completion of the deal instead of the announcement If you want to control for deals that happened within or cross industry. If you want to control for deals that happened within or cross country. Event Study Tool CARs In the excel file from Zephyr there are two important columns. First the column with the Acquirer ISIN number. Second the column with the Announced date. Open the Event Study Tool from the EDSC website. From the Zephyr file copy (Cntrl + c) the Acquirer ISIN numbers and paste (cntrl + p) these under Company in the Event Study Tool. Notice that in some deals the ISIN code is missing. You could try to find the codes for these companies elsewhere, but for the purposes of this example I will ignore them. Now copy the Announced date and past this under Date. Make sure that Excel recognizes the cells as dates. 6 In this example we will compare everything with the same index. We do however need to find the appropriate index to compare it with. To find this index you can try to google it or preferable use a database from the EDSC such as Datastream. In this case I use the MSCI Europe index. For information about the estimation period and event period see the manual on the Event Study Tool. Your Excel file should look similar to the figure below. Now if you have access to Datastream you can click on Process Table in the Request-Table tab. Otherwise you can send the file to the EDSC and they will send you the output. 6 Format cells as dates.
Orbis Financials In our research question we were interested in the effect of target cash holdings on the stock prices of the acquirers. This means that we will need to download the target cash holdings for the year before the deal. That way we make sure that the financials are not influenced by the effects of the deal or the new acquirer. In most researches you will probably want to download more than only the cash holdings of the target. For example in your analysis you may want to control for size, profitability, leverage, etc. of the target or acquirer. For profitability and leverage we then need to define how we calculate them. For example we can calculate profitability as net income over total assets and leverage as total debt over total assets. All of these annual report items can be downloaded in a similar way as the cash holdings of the target. In this example we will use Orbis to download the financials because we need the financials of global targets, which could either be public or private companies. This means that we can choose between Worldscope and Orbis. In this case I prefer Orbis because the acquirers are Dutch companies, thus there is a high probability that the targets are concentrated in Europe. Moreover the targets could be quite small. Orbis has a good coverage of small European firms. Finally because we used Zephyr to download the financials, the interface of Orbis will be easy to understand. The first step to obtain the financials is to create a list of identifiers of the targets. In this case we will only need unique identifiers. 7 We will simply do this by copying the list of BvD ID numbers of the targets and paste them in a new excel file. We prefer the BvD ID number because Orbis is a Bureau van Dijk database 7 Some companies could have been a target more than once in our deal sample. For the purposes of downloading financials we can drop the duplicates and keep only the first time a company has been observed as a target.
and more importantly because the targets could be private companies as well. The BvD ID number has a better coverage of private companies. Now drop the duplicates 8 in the excel file and save it. The second step is to upload the identifiers into Orbis. After uploading the identifiers into Orbis, go to list of view list of results. Create your report and in this example we will want to include at least the total cash or total cash and short term investments. Other interesting variables that I include are the NACE2 code (industry identifier), total assets, total debt, operating revenue, and net income. Merging the Data Now we have 3 separate files, which we need to combine in order to do our analysis. In this manual I will explain two ways of matching your data. The first method will use Stata, a statistical software program. If you know a bit about Stata, this is definitely the easiest way. And even if you do not know a lot about Stata the simple steps discussed below can be understand with relatively little knowledge on the program. The second method will use Excel. Within Excel you can use VLOOKUP to add data or you can use INDEX + MATCH. For most users VLOOKUP might be well-known and easy to use, but in large files it is a very heavy procedure and your file needs to be organized from left-to-right. Meaning that what you are searching for is always to the left of the array. INDEX + Match is much more convenient and if taken the time almost just as easy to implement. For that reason I will only discuss INDEX + MATCH. The key in every matching procedure is having the right identifier (unique or non-unique). For merging data you will sometimes need a company level identifier or a line identifier. The latter meaning that all lines in your data must have a unique code. When you want to match files always think about the structure of the observations (deal level, company level, etc.) in your files. For example, do you have any duplicates in one of the files? How should I deal with these duplicates? And what is our observation of interest? In our example we are interested in the effect of the target level cash holdings on CARs of deals. In this case our number of deals is equal or greater to the number of targets, because one company can be a target in multiple deals, but each deal will have only one target. 9 This also follows from the files in which the deal file contains more rows (observations) than the file from Orbis. Now our Event Study file contains the same number of observations (CARs) as the number of observations (deals) in the deal file. Thus we have: # deals = # CAR > # targets 8 After you selected the data, go to Data > drop duplicates. 9 In some deals there can be multiple target purchased. In this example I only kept the first target. An easy way out is to act as if each target bought is a separate deal.
Stata Preparing the files I will first explain how to merge these files in Stata. The key in Stata is that when we combine file 1 and file 2 then in both of these files the same identifier should be present. Preferable in one of those files the identifier should be unique for all rows (observations). But before we start matching the files, we will create Stata files from the Excel files. Zephyr Open Stata and then go to: File > Import > Excel spreadsheet (*.xls;*.xlsx). Next click on Browse and import the first Excel File. For the file from Zephyr we need to go to the second worksheet. So under Worksheet: click on the dropdown menu and select Results. Next tick the Import first row as variable names. Then click on OK. Now before we save the file we are going to rename the matching variables, which is the identifier. The names of these variables must be exactly the same in each file. There are several ways to do this. In the command box, type: rename TargetBvDIDnumber TARGET_BVDID rename TargetISINnumber TARGET_ISIN rename AcquirorBvDIDnumber ACQ_BVDID rename AcquirorISINnumber ACQ_ISIN Now we are going to take one extra step. We have our Target company level identifier (BVDID), however we still need a deal line identifier. And we need to make sure that this identifier is also available in the file contains CARs. Remember that we used ISIN codes and announcement dates to calculate CARs. Therefore we are going to create a new variable, which will be the new identifier: tostring(announceddate), replace gen Dealidentifier = ACQ_ISIN + Announceddate The final adjustment is that we already are going to clean the file by dropping observations with insufficient data. Please do not that these steps are only followed to give an example on how to merge the dataset. Always understand why you need to drop observations. Therefore: drop if ACQ_ISIN == "" drop if TARGET_BVDID == "" Note: The above lines are only useful when you use data from Zephyr. Save the file. Orbis Next up is the Orbis file. Follow the same steps and again make sure that the Results worksheet is selected. If Stata gives an error when trying to import data then delete the first sheet in Excel in which the search strategy is explained. Again we are going to rename the matching variables. Use the following line:
rename BvDIDnumber TARGET_BVDID Save the file. Event Study Tool Last up is the file containing the CARs. I prepared the file in Excel, by adding the abnormal returns to get CARs. Also I reshaped the data within the file. See the figure below: Now follow similar steps as for the previous files. Upload the file in Stata and rename the variables: rename Name ACQ_ISIN tostring(eventdate), replace gen Dealidentifier = ACQ_ISIN + EventDate 10 Save the file. Merging the files Finally we are ready to merge the data. First I will match the deal data with the CARs. Then I will add the financials to these deals. Again you could use codes to merge the datasets, but I will explain the pointand-click method. Open the file from Zephyr. Now go to Data > Combine Datasets > Merge two datasets. A pop-up will appear. In this screen select One-to-one on key variables. In the dropdown under Key Variables: (match variables) choose Dealidentifier. Finally in the last line, click on browse and search for the CAR File. After the files have been matched drop the _merge variable or rename it. Now to add the file from Orbis we are going to follow similar steps. Except in this case we will select Many-to-one on key variables and as Key variable we are going to select TARGET_BVDID. We choose many-to-one because we have multiple deals that need to be merged to the same target company. Choose the Orbis file and click on OK. 10 Notice that the dates are in MM/DD/YYYY. For that reason we also changed our Zephyr Stata file into that format.
Potential issues: - Sometimes you have duplicates in your master or using file. Open the file and check for duplicates via Data > Data Utilities > Tag duplicated observations. As variable set your matching variable, which you thought to be unique. Then as New variable name you can enter for example dup. Click on OK. Now go to the data editor and check why you have duplicates. If it is not important then you can decide to drop the duplicates from the sample. - The results will show the number of matches. Check if everything went well. Sometimes we had to drop deals with insufficient data. Other deals might not have had enough stock price data to calculate abnormal returns.
EXCEL: INDEX MATCH Although it is not necessary it might be easier to put all files into a single excel sheet (on separate tabs). First of all we are going to create unique lines for the CARs and Zephyr. For Orbis this is not necessary. We do this by simple combining two columns. For the cumulative abnormal returns: For Zephyr we are going to combine the Acquiror ISIN number and Announced date: Now if we start from the Zephyr tab and add the other two, then do the following: Use the INDEX function to find the CAR that corresponds to the row in Zephyr. Within this INDEX function use the MATCH function to find out which row in the Zephyr tab corresponds to which row of the CAR tab: Now to add the data from Orbis to the Zephyr tab we are going to use the same two function. However instead of using our Unique line column we can use the Target BvD ID number : This formula can be dragged across the entire file.