The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns

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Abstract
This paper evaluates a nonparametric sign test for abnormal security price performance in event studies. The sign test statistic examined here does not require a symmetrical distribution of security excess returns for correct specification. Sign test performance is compared to a parametric t-test and a nonparametric rank test. Simulations with daily security return data show that the sign test is better specified under the null hypothesis and often more powerful under the alternative hypothesis than a t-test. The performance of the sign test is dominated by the performance of a rank test, however, indicating that the rank test is preferable to the sign test in obtaining nonparametric inferences concerning abnormal security price performance in event studies.

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