Undergraduate Honors Theses

Thesis Defended

Spring 2015

Document Type

Thesis

Type of Thesis

Departmental Honors

Department

Economics

First Advisor

Keith Maskus

Second Advisor

Nicholas Flores

Third Advisor

Nathalie Moyen

Abstract

The pharmaceutical industry presents a unique opportunity to explore the intersection between product innovation and the corresponding market response. The emergence of life-enhancing drugs paired with the careful record keeping of the World Intellectual Patent Organization (WIPO) and the Federal Drug Administration (FDA) create a backdrop, which allows the relationship between announcements and firm value to be examined empirically. The motivational theory behind this paper stems from the efficient markets hypothesis (EMH), which suggests that public information such as patent application and publication would be incorporated efficiently in stock market returns. The relationship between R&D, stock market return, and patent generation is dynamic and an event study has widespread implications for investors and market strategists. This event-study design emulated from Fama and French’s (1993) three-factor model allows for direct observation of the impact central nervous system (CNS) pharmaceutical innovation has on firm-specific returns. This paper finds a statistically significant increase in returns leading up to patent application for a CNS drug for domestically-traded firms, yet identifies a negative trend in returns surrounding the subsequent patent publication dates. Explained in more detail below, the decreasing returns firms experience as a firm’s innovation nears completion can be explained by the models used which linearly capture this risk and generate decreasing returns.

Included in

Finance Commons

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