Detecting Securities Fraud through Forensic Economics: Event Study of Compass Diversified Holdings

Introduction

On May 7, 2025, Compass Diversified Holdings (NYSE: CODI) disclosed that its 2024 financial statements could no longer be relied upon due to significant irregularities at its subsidiary, Lugano. The result was a massive sell-off: Compass stock fell from $17.25 to $6.55 the next day, a loss of over 62%. We conducted an event study to determine whether this decline was statistically significant and economically attributable to the disclosure.

Methodology

An event study is a standard econometric tool used in securities litigation to assess whether a particular disclosure caused an abnormal movement in stock price.

We analyzed CODI’s stock price behavior relative to the S&P 500 index (market proxy) using the following steps:

1. Estimation Window: 120 trading days before the event date (May 7, 2025).

2. Event Window: 5 days before and after the event.

3. Regression Model: Estimated expected returns using a market model.

4. Abnormal Returns (AR): Difference between actual and expected returns during the event window.

5. Cumulative Abnormal Return (CAR): Sum of abnormal returns across the event window.

Results

The chart displays abnormal returns around the May 7 disclosure:

• On May 8, 2025, CODI experienced a statistically significant abnormal return of approximately -65%, far exceeding normal price fluctuations.

• No other trading days within the event window showed abnormal returns of similar magnitude.

The results of the event study support the claim that Compass’s May 7 disclosure directly caused a material drop in stock price. This abnormal movement is consistent with loss causation under Dura Pharmaceuticals v. Broudo and provides empirical backing for securities fraud litigation.

Forensic Economic Services, LLC stands ready to assist law firms with rigorous event study analysis, economic loss modeling, and expert support through each phase of the case.