as that in Figures 12.5 and 12.6. If insider trading rules were widely and flagrantly violated, we would expect to see abnormal returns earlier than they appear in these results. For example, in the case of mergers, the CAR would turn positive as soon as acquiring firms decided on their takeover targets, because insiders would start trading immediately. By the time of the public an- nouncement, the insiders would have bid up the stock prices of target firms to levels re- flecting the merger attempt, and the abnormal returns on the actual public announcement date would be close to zero. The dramatic increase in the CAR that we see on the an- nouncement date indicates that a good deal of these announcements are indeed news to the market and that stock prices did not already reflect complete knowledge about the takeovers. It would appear, therefore, that SEC enforcement does have a substantial effect on restricting insider trading, even if some amount of it still persists. Event study methodology has become a widely accepted tool to measure the economic impact of a wide range of events. For example, the SEC regularly uses event studies to measure illicit gains captured by traders who may have violated insider trading or other se- curities laws.6 Event studies are also used in fraud cases, where the courts must assess dam- ages caused by a fraudulent activity. As an example of the technique, suppose that a company with a market value of $100 million suffers an abnormal return of -6% on the day that news of a fraudulent activity surfaces. One might then infer that the damages     6 For a review of SEC applications of this technique, see Mark Mitchell and Jeffry Netter, "The Role of Financial Economics in Securities Fraud Cases: Applications at the Securities and Exchange Commission," School of Business Administration, The Uni- versity of Michigan, working paper No. 93-25, October 1993. III. Equilibrium In Capital Markets 12. Market Efficiency The McGraw−Hill Companies, 2001           CHAPTER 12 Market Efficiency 355     sustained from the fraud were $6 million, because the value of the firm (after adjusting for general market movements) fell by 6% of $100 million when investors became aware of the news and reassessed the value of the stock.   CONCEPT C H E C K ☞ QUESTION 4 Suppose that we see negative abnormal returns (declining CARs) after an announcement date. Is this a violation of efficient markets?