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FDA Drug Approvals: Time Is Money!

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  • Andreas Sturm

    (University of Regensburg, Germany)

  • Michael J. Dowling

    (University of Regensburg, Germany)

  • Klaus Röder

    (University of Regensburg, Germany)

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    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.

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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

    Volume (Year): 12 (2007)
    Issue (Month): 2 (Fall)
    Pages: 23-54

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    Handle: RePEc:pep:journl:v:12:y:2007:i:2:p:23-54

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    Related research

    Keywords: FDA; Pharmaceuticals; Efficient Markets Hypothesis; EMH;

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    References

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    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
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