IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v45y2013i2p99-111.html
   My bibliography  Save this article

Valuation implications of pharmaceutical companies' R&D regulatory approval notifications

Author

Listed:
  • Hamill, Philip A.
  • McIlkenny, Philip
  • Opong, Kwaku K.

Abstract

This paper examines shareholder wealth effects surrounding applications to, and approvals by, the United States Food and Drug Administration (FDA) for firms listed on the New York (NYSE) and London (LSE) stock exchanges. Applications to the FDA for drug approvals significantly increase shareholder wealth for NYSE firms only. The increase is driven by applications for enhancements to existing drugs, with the market anticipating the application, thus suggesting information leakage. FDA approvals also significantly increase shareholder wealth in both markets. However, there is no evidence of information leakage and the significant post-event abnormal returns support the attention-grabbing hypothesis. Enhanced drug approvals are value-relevant for both markets, which highlights the contribution of real-options to firm value.

Suggested Citation

  • Hamill, Philip A. & McIlkenny, Philip & Opong, Kwaku K., 2013. "Valuation implications of pharmaceutical companies' R&D regulatory approval notifications," The British Accounting Review, Elsevier, vol. 45(2), pages 99-111.
  • Handle: RePEc:eee:bracre:v:45:y:2013:i:2:p:99-111
    DOI: 10.1016/j.bar.2013.03.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838913000206
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.bar.2013.03.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    2. Sydney D. Howell & Axel J. Jägle, 1997. "Laboratory Evidence on How Managers Intuitively Value Real Growth Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 915-935.
    3. Mc Namara, Peter & Baden-Fuller, Charles, 2007. "Shareholder returns and the exploration-exploitation dilemma: R&D announcements by biotechnology firms," Research Policy, Elsevier, vol. 36(4), pages 548-565, May.
    4. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    5. Hartmann, Marcus & Hassan, Ali, 2006. "Application of real options analysis for pharmaceutical R&D project valuation--Empirical results from a survey," Research Policy, Elsevier, vol. 35(3), pages 343-354, April.
    6. Archana Hingorani & Karen Shastri & Kuldeep Shastri, 1994. "Product Regulation and Stock Prices: The Case of the US Food and Drug Administration," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(2), pages 163-178.
    7. Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-349, June.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Flavin, Thomas J., 2004. "The effect of the Euro on country versus industry portfolio diversification," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1137-1158.
    10. Dranove, David & Olsen, Chris, 1994. "The Economic Side Effects of Dangerous Drug Announcements," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 323-348, October.
    11. Dye, Ronald A., 2001. "An evaluation of "essays on disclosure" and the disclosure literature in accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 181-235, December.
    12. Hamill, Philip A. & Opong, Kwaku K. & McGregor, Pat, 2002. "Equity option listing in the UK: a comparison of market-based research methodologies," Journal of Empirical Finance, Elsevier, vol. 9(1), pages 91-108, January.
    13. Paul M. Healy & Amy P. Hutton & Krishna G. Palepu, 1999. "Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 485-520, September.
    14. Barry L. Bayus & Gary Erickson & Robert Jacobson, 2003. "The Financial Rewards of New Product Introductions in the Personal Computer Industry," Management Science, INFORMS, vol. 49(2), pages 197-210, February.
    15. 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.
    16. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    17. Corrado, Charles J., 1989. "A nonparametric test for abnormal security-price performance in event studies," Journal of Financial Economics, Elsevier, vol. 23(2), pages 385-395, August.
    18. Frank T. Rothaermel & David L. Deeds, 2004. "Exploration and exploitation alliances in biotechnology: a system of new product development," Strategic Management Journal, Wiley Blackwell, vol. 25(3), pages 201-221, March.
    19. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    20. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    21. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    22. Frank T. Rothaermel, 2001. "Incumbent's advantage through exploiting complementary assets via interfirm cooperation," Strategic Management Journal, Wiley Blackwell, vol. 22(6‐7), pages 687-699, June.
    23. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    24. Rothaermel, Frank T., 2001. "Complementary assets, strategic alliances, and the incumbent's advantage: an empirical study of industry and firm effects in the biopharmaceutical industry," Research Policy, Elsevier, vol. 30(8), pages 1235-1251, October.
    25. Dedman, Elisabeth & Lin, Stephen W.-J & Prakash, Arun J. & Chang, Chun-Hao, 2008. "Voluntary disclosure and its impact on share prices: Evidence from the UK biotechnology sector," Journal of Accounting and Public Policy, Elsevier, vol. 27(3), pages 195-216.
    26. Monica Espinosa & Miles Gietzmann & Ivana Raonic, 2009. "US Institutional Investors Response to the News Flow of Intangibles Intensive European Stocks: A Study of European BioTech and Pharma Stocks," European Accounting Review, Taylor & Francis Journals, vol. 18(1), pages 63-92.
    27. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    28. Sydney D. Howell & Axel J. Jägle, 1997. "Laboratory Evidence on How Managers Intuitively Value Real Growth Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 915-935, September.
    29. 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.
    30. Wang, Chaug-Jung & Lee, Chien-Hui & Huang, Bwo-Nung, 2003. "An analysis of industry and country effects in global stock returns: evidence from Asian countries and the U.S," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 560-577.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hamill, Philip A. & Hutchinson, Mark & Nguyen, Quang Minh Nhi & Mulcahy, Mark, 2018. "FDA approval announcements: Attention-grabbing or event-day misspecification?," Economics Letters, Elsevier, vol. 170(C), pages 171-174.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wijayana, Singgih & Gray, Sidney J., 2018. "Capital market consequences of cultural influences on earnings: The case of cross-listed firms in the U.S. stock market," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 134-147.
    2. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    3. Kiesel, Florian & Ries, Jörg M. & Tielmann, Artur, 2017. "Reprint of “The impact of mergers and acquisitions on shareholders' wealth in the logistics service industry”," International Journal of Production Economics, Elsevier, vol. 194(C), pages 261-277.
    4. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    5. Cunha, P.A.M.F.V., 2005. "The value of cooperation : Studies on the performance outcomes of interorganizational alliances," Other publications TiSEM 59466e6c-1920-461e-b5e9-b, Tilburg University, School of Economics and Management.
    6. Corrado, Charles J. & Truong, Cameron, 2008. "Conducting event studies with Asia-Pacific security market data," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 493-521, November.
    7. Frendy, & Hu, Dan, 2014. "Japanese stock market reaction to announcements of news affecting auditors’ reputation: The case of the Olympus fraud," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(3), pages 206-224.
    8. Marie-Anne Cam & Vikash Ramiah, 2014. "The influence of systematic risk factors and econometric adjustments in catastrophic event studies," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 171-189, February.
    9. Dayanandan, Ajit & Donker, Han & Karahan, Gökhan, 2017. "Do voluntary disclosures of bad news improve liquidity?," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 16-29.
    10. Ding, Li & Lam, Hugo K.S. & Cheng, T.C.E. & Zhou, Honggeng, 2018. "A review of short-term event studies in operations and supply chain management," International Journal of Production Economics, Elsevier, vol. 200(C), pages 329-342.
    11. Hamill, Philip A. & Hutchinson, Mark & Nguyen, Quang Minh Nhi & Mulcahy, Mark, 2018. "FDA approval announcements: Attention-grabbing or event-day misspecification?," Economics Letters, Elsevier, vol. 170(C), pages 171-174.
    12. Mc Namara, Peter & Baden-Fuller, Charles, 2007. "Shareholder returns and the exploration-exploitation dilemma: R&D announcements by biotechnology firms," Research Policy, Elsevier, vol. 36(4), pages 548-565, May.
    13. Kiesel, Florian & Ries, Jörg M. & Tielmann, Artur, 2017. "The impact of mergers and acquisitions on shareholders' wealth in the logistics service industry," International Journal of Production Economics, Elsevier, vol. 193(C), pages 781-797.
    14. Turan G. Bali & Robert F. Engle & Yi Tang, 2017. "Dynamic Conditional Beta Is Alive and Well in the Cross Section of Daily Stock Returns," Management Science, INFORMS, vol. 63(11), pages 3760-3779, November.
    15. Loukil, Nadia & Yousfi, Ouidad, 2010. "Firm's information environment and stock liquidity: evidence from Tunisian context," MPRA Paper 28699, University Library of Munich, Germany, revised Feb 2011.
    16. Monica Martinez-Blasco & Vanessa Serrano & Francesc Prior & Jordi Cuadros, 2023. "Analysis of an event study using the Fama–French five-factor model: teaching approaches including spreadsheets and the R programming language," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-34, December.
    17. Gokhale, Jayendra & Brooks, Raymond M. & Tremblay, Victor J., 2014. "The effect on stockholder wealth of product recalls and government action: The case of Toyota's accelerator pedal recall," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 521-528.
    18. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
    19. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    20. Xu, Mingli & Yang, Wei & Huang, Zhixiong, 2021. "Do investor relations matter in the tourism industry? Evidence from public opinions in China," Economic Modelling, Elsevier, vol. 94(C), pages 923-933.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:45:y:2013:i:2:p:99-111. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.