The Event Study Method in Brief

Introduction

I had some friends asked me once where I got some ideas from that find their way into my articles. As always, a range of answers depending on the actual project. I derived some ideas over beer at barbecues with work friends and colleagues. Other project ideas grew from interesting observations and findings in some of my student projects. I source many of ideas from other research in the literature or professional issues that remain unresolved by research.

In contrast, this chapter walks us through a study I worked on where we examined the stock market reaction to toy recalls. The motivation and genesis for this project is embarrassing as it was not originally motivated so the standard reasons for doing a project. Rather, I had been at a conference where I met some people who said (and I paraphrase liberally): “Gosh, operations management how dull and boring. We like our subject of psychology because we can apply this and learn from it in everyday life.” Later, when a friend knew we are expecting our first child, he joked with me that I could not make operations management relevant to parenthood. Taken together, I construed these as a challenge to do a project that would have some relevance to everyday life, was personally relevant to me as a soon-to-be parent, and used operations management concepts.

I settled on the idea of toy recalls, as this was of relevance to my (developing, parentally-focused!) shopping habits and I was sure that it would generate an abnormal return for several reasons. First, there is already considerable research on recalls showing a negative stock market reaction. That is, investors are market participants believe that recalls negatively affect the company. Second, from discussions with my wife and with other parents, I know the parents place high importance on safety and are, thus, very careful in the selection of the products that they buy and use relating to the children. Therefore, a company that produced poor quality, dangerous, and substandard products and exposed children to these products would therefore experience recalls. Recalls and reputation would mean the firm struggles to continue to obtain strong future sales. That is, parents will perceive a strong negative reputational effect from recalls that would lead to decreased sales in the future. Product safety and the underlying standards are crucial (Liu et al., 2016; Rausand & Utne, 2009; Speier et al., 2011; Suhanyiova et al., 2016; Zhu et al., 2018). Conformity with standards and certification and recalls as a method to address observe quality issues is crucial (Beamish & Bapuji, 2008; Hora et al., 2011). There are several approaches to ensure quality toys are sold. Manufacturers must follow quality standards and government bodies often have requirements for particular types of products, such as food (Hammoudi et al., 2009), or a range of consumer-focusing products (CPSC, 2015).

From this, I identified the major topic for the paper. However, as we can see from the following chapter, the journey was not a simple nor straightforward one and my first daughter was about two and a half years old before the study was accepted and published. While the coverage is brief, the chapter provides some insight into some thinking behind the research design and some parameter selection decisions that were used inside of the project.