Past is Prologue: Inference from the Cross Section of Returns Around an Event

Jonathan Cohn, Travis Johnson, Zack Liu and Malcolm Wardlaw
Journal of Financial Economics (2026)

Abstract

Confounding events can cause false positives when testing the relationship between short-term returns around a quasi-experimental event and firm characteristics. We show that this risk is severe in practice: return-characteristic relationships are often statistically significant at the 1% level on over 30% of all trading days. Benchmarking a relationship against the distribution of the same relationship on pre-event days is effective at addressing the problem. We introduce a novel GLS variation of this approach that achieves large gains in statistical power relative to OLS and provide Stata and Python modules that implement both procedures.

Cite

@article{cohn2026past,
  title   = {Past is Prologue: Inference from the Cross Section of Returns Around an Event},
  author  = {Jonathan Cohn and Travis Johnson and Zack Liu and Malcolm Wardlaw},
  journal = {Journal of Financial Economics},
  year    = {2026},
  doi     = {10.1016/j.jfineco.2026.104278}
}