Review of Quantitative Finance and Accounting, 14 (2000): 45±65
# 2000 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Detecting Abnormal Bid-Ask Spread: A Comparison of
Event Study Methods
Department of Finance and Business Economics
CAROLYN M. CALLAHAN
KPMG Faculty Fellow, Department of Accountancy
Department of Accountancy, College of Business Administration, University of Notre Dame,
Notre Dame, IN 46556
Abstract. This study examines empirical issues associated with the use of bid-ask spreads in event studies. The
simulation results indicate that the distribution of average standardized abnormal spread shows little deviation
from normality. Simulation results also indicate that the widely used percent spread metric results in test statistics
with low power. In contrast, use of a standardized raw spread metric and a simple mean-adjusted expectation
model results in well speci®ed and reasonably powerful Patell and Brown-Warner type test statistics. As the
abnormal spread series is characterized by high ®rst order serial correlation, it is important to adjust for this serial
correlation when using multi-day event windows.
Key words: bid-ask spread, event study methods, simulation
JEL Classi®cation: C15, G7, G14
Accounting and ®nance research studies have generally used abnormal security returns to
test the market's response around ®rm-speci®c information release dates. Since the early
eighties, several published studies have addressed signaling issues around earnings and
other announcements using bid-ask spread data (e.g., Morse and Ushman, 1983;
Venkatesh and Chiang, 1986; Barclay and Smith, 1988; Hegde and Miller, 1989;
Conroy, Harris and Benet, 1990; Jennings, 1991; Skinner, 1991; and Conrad and Niden,
1992). More recently, several empirical studies have examined the behavior of bid-ask
spreads around earnings announcement dates (Af¯eck-Graves, Callahan and Chipalkatti,
1999; Brooks, 1994; Greenstein and Sami, 1994; Lee, Mucklow and Ready, 1994; Krinsky
and Lee, 1996 and Yohn, 1998). Further, Hagigi, Kluger and Shields (1993), Franz, Rao
and Tripathy (1995), and Coller and Yohn (1997) empirically examine abnormal spread
around public information events other than earnings.
*Address correspondence to: John Af¯eck-Graves, College of Business Administration, University of Notre
Dame, Notre Dame, IN 46552.