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FDA Drug Approvals: Time Is Money!

Author

Listed:
  • Andreas Sturm

    (University of Regensburg, Germany)

  • Michael J. Dowling

    (University of Regensburg, Germany)

  • Klaus Röder

    (University of Regensburg, Germany)

Abstract

We investigated the stock price behavior of public pharmaceutical and biotechnology companies upon approval of a drug by the Food and Drug Administration (FDA). Using event study methodology, we examine the reaction caused by the approval, seperating it from the asset price movements caused by other factors such as market and industry effects. The results are then used to validate the model developed in this article as an alternative to the explanations given by Sharma and Lacey (2004). The results of this study support the Efficient Market Hypothesis, i.e. that the market reacts to the new information quickly and clearly.

Suggested Citation

  • Andreas Sturm & Michael J. Dowling & Klaus Röder, 2007. "FDA Drug Approvals: Time Is Money!," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(2), pages 23-54, Fall.
    • Handle: RePEc:pep:journl:v:12:y:2007:i:2:p:23-54
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    References listed on IDEAS

    as
    1. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 10(2), pages 107-142, July.
    2. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
    3. Henry Grabowski & John Vernon, 1990. "A New Look at the Returns and Risks to Pharmaceutical R&D," Management Science, INFORMS, vol. 36(7), pages 804-821, July.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    5. Sarkar, Salil K. & de Jong, Pieter J., 2006. "Market response to FDA announcements," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(4), pages 586-597, September.
    6. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
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    Citations

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    Cited by:

    1. Nicolau, Juan Luis & Sharma, Abhinav, 2022. "A review of research into drivers of firm value through event studies in tourism and hospitality: Launching the Annals of Tourism Research curated collection on drivers of firm value through event stu," Annals of Tourism Research, Elsevier, vol. 95(C).
    2. Miller, Kathleen L. & Nardinelli, Clark & Pink, George & Reiter, Kristin, 2018. "The signaling effects of incremental information: Evidence from stacked US Food and Drug Administration designations," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 219-226.

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    More about this item

    Keywords

    FDA; Pharmaceuticals; Efficient Markets Hypothesis; EMH;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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