Event studies measure how prices react to news, but their reliability depends entirely on whether the market was efficient enough to react.
In securities and shareholder claims, an event study isolates the share-price movement attributable to a disclosure by stripping out market and industry effects. The resulting abnormal return often becomes the foundation of the damages figure. Yet the method quietly assumes that prices absorbed the information promptly and fully, an assumption that deserves scrutiny rather than acceptance.
Where efficiency breaks down
Thinly traded shares, companies with concentrated ownership and markets under stress can all respond to news slowly or erratically. In those conditions, a single-day window may miss much of the reaction, while a longer window captures unrelated noise. Confounding announcements released on the same day compound the difficulty considerably. Separating the effect of each piece of news then requires judgement that should be explained openly.
An abnormal return is only as meaningful as the market that produced it.
Careful experts test efficiency directly—examining trading volume, analyst coverage, bid–ask spreads and the speed of past price responses—before relying on the results. Where efficiency is weak, they say so and adapt the method rather than presenting a precise figure that the data cannot support. Alternatives such as intraday analysis or comparable-company benchmarks may then carry more weight.
Building a defensible analysis
Tribunals and courts respond well to transparency about these limits. Reporting results across several event windows, disclosing statistical significance and addressing confounding news explicitly allows the decision-maker to judge how much weight the analysis bears. That candour tends to strengthen, not weaken, the expert’s overall credibility under cross-examination. It also narrows the genuine disagreement between experts, which tribunals increasingly expect joint reports to achieve.