Product Regulation and Stock Prices: The Case of the US Food and Drug Administration

This study focuses on the stock market effects associated with the announcements of product approvals, denials and recalls by the US Food and Drug Administration (FDA), and the impact of product approvals on research and development expenditures (R&D) and forecasts of earnings by Value Line. When the FDA announces approvals, the shareholder wealth of affected firms increases significantly. The announcements of denials and recalls by the FDA are associated with stock price declines. The stock price impact of recalls is dependent on whether the firm voluntarily withdraws a product or if the withdrawal is mandated by the FDA. Specifically, voluntary recalls are not associated with a change in stockholder wealth, while FDA mandated recalls are associated with decreases in stock price. In addition, we find that partial product recalls have a smaller impact than total recalls. An examination of the effects on competitors' stock price reveals losses when the FDA announces an approval or a recall, but no imt for a d. An analysis of changes in risk around FDA decisions suggests that, on average, betas do not change around approvals, recalls or denials. In addition, our results suggest that announcement period stock price behavior is unrelated to risk changes except for approvals where returns are positive and significant for firms with either increasing risk or no change in risk. We also find that approvals are associated with increases in R&D and forecasts of earnings for the sample firms, with returns to stockholders upon announcement of the approval being related to the increases in R&D and short-term earnings forecasts.FDA product regulation; Stock price; Risk; R&D expenditures; Earnings forecasts JEL classifications:G14,K23,L5,

Do Stock Prices Follow Random Walks: An Analysis of the Tokyo Stock Exchange

The purpose of this study is to evaluate the random walk hypothesis in the context of stocks traded on the Tokyo Stock Exchange (TSE). Using a volatility based specification test developed by Lo and McKinlay (1988), we conclude that the stock prices for small firms do not follow a random walk. To determine if this deviation from random walks is associated with long-range dependence, we estimate and analyze the modified "range over standard deviation" statistic constructed by Lo (1991). The results of this analysis suggest that short-term memory is most likely the reason for the observed structure of returns

An Explanation of Seemingly Anomalous Time Premium Behavior for American Put Options

ABSTRACT It is thought that American options always gain value as the time to the option's expiration date increases. Merton (1973) proved this result using simple arbitrage arguments for options on non-dividend paying stocks. However, market prices reveal that (i) an American put can increase in value as calendar time passes diminishing the options time to expiration and (ii) two puts which differ only in expiration cycle can "sell" for the same price (i.e. a zero differential time premium). This paper demonstrates that dividend payments can cause this seemingly anomalous time premium behavior for American put options

An Explanation of Seemingly Anomalous Time Premium Behavior for American Put Options

ABSTRACT It is thought that American options always gain value as the time to the option's expiration date increases. Merton (1973) proved this result using simple arbitrage arguments for options on non-dividend paying stocks. However, market prices reveal that (i) an American put can increase in value as calendar time passes diminishing the options time to expiration and (ii) two puts which differ only in expiration cycle can "sell" for the same price (i.e. a zero differential time premium). This paper demonstrates that dividend payments can cause this seemingly anomalous time premium behavior for American put options