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The Economic Side Effects of Dangerous Drug Announcements

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  • Dranove, David
  • Olsen, Chris

Abstract

Immediately prior to the passage of the 1962 Food and Drug Administration Amendments, there were a number of drugs recalled from markets worldwide. Announcements about the dangerous side effects of these drugs were associated with lower-share prices for their manufacturers and the industry as a whole. We perform several analyses to sort out alternative explanations for the observed declines. We find that dangerous drug announcements had no effect on the sales of other drugs and didn't affect the share values of European drug makers doing little business in the U.S. We also find that share-price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs. These patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new (and more stringent) drug-testing requirements. Copyright 1994 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 37 (1994)
Issue (Month): 2 (October)
Pages: 323-48

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Handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:323-48

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Catherine Liston-Heyes & Gwen Ceton, 2009. "An Investigation of Real Versus Perceived CSP in S&P-500 Firms," Journal of Business Ethics, Springer, Springer, vol. 89(2), pages 283-296, October.
  2. Sanjai Bhagat & Roberta Romano, . "Event Studies and the Law--Part I: Technique and Corporate Litigation," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy yale_lepp-1021, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  3. Collins, J. Michael & Simon, Kosali I. & Tennyson, Sharon, 2013. "Drug withdrawals and the utilization of therapeutic substitutes: The case of Vioxx," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 148-168.
  4. John Cawley & John A. Rizzo, 2005. "The Competitive Effects of Drug Withdrawals," NBER Working Papers 11223, National Bureau of Economic Research, Inc.
  5. Ferguson, Andrew & Crockett, Adrian, 2003. "Information transfer and press coverage: The case of the Gawler Craton gold boom," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(1), pages 101-120, January.
  6. Sanjai Bhagat & Roberta Romano, 2001. "Event Studies and the Law - Part I: Technique and Corporate Litigation," Yale School of Management Working Papers, Yale School of Management amz2475, Yale School of Management, revised 01 Jan 2002.
  7. Seth M. Freedman & Melissa Schettini Kearney & Mara Lederman, 2009. "Product Recalls, Imperfect Information, and Spillover Effects: Lessons from the Consumer Response to the 2007 Toy Recalls," NBER Working Papers 15183, National Bureau of Economic Research, Inc.
  8. Ni, John Z. & Flynn, Barbara B. & Jacobs, F. Robert, 2014. "Impact of product recall announcements on retailers׳ financial value," International Journal of Production Economics, Elsevier, Elsevier, vol. 153(C), pages 309-322.
  9. Thomsen, Michael R. & Ollinger, Michael & Crandall, Philip G. & O'Bryan, Corliss, 2008. "Mandatory Food Recalls," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 6083, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  10. Henson, Spencer J. & Hooker, Neal H., 2001. "Private Sector Management Of Food Safety: Public Regulation And The Role Of Private Controls," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), International Food and Agribusiness Management Association (IAMA), vol. 4(01).
  11. Andrew Cooke & Wendy Chapple, 1998. "Guilty by Association? The Case of The Karin B Scare," European Journal of Law and Economics, Springer, Springer, vol. 5(1), pages 5-12, January.
  12. Eng Cheah & Wen Chan & Corinne Chieng, 2007. "The Corporate Social Responsibility of Pharmaceutical Product Recalls: An Empirical Examination of U.S. and U.K. Markets," Journal of Business Ethics, Springer, Springer, vol. 76(4), pages 427-449, December.

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