The Complementary Relationship Between Financial and Non-Financial Information in the Biotechnology Industry and the Degree of Investor Sophistication

Abstract

We examine whether financial and non-financial variables, separately and in tandem, are value relevant in explaining market returns, equity values and the degree of investment by sophisticated investors for a sample of drug development companies. Patent counts, number of collaborations and probability-adjusted portfolios of drugs under development are the non-financial information metrics used in this study. Earnings are the main financial information variable. We show that news about these non-financial measures is significantly associated with abnormal returns. We also find that earnings are value relevant in explaining cumulative abnormal returns and equity prices around earnings announcement dates despite the fact that R&D expenditures are large and usually expensed as incurred. We further show that non-financial information is value relevant in explaining annual returns, equity prices and degree of investment by (long-horizon) sophisticated investors. Moreover, non-financial variables are value relevant after controlling for financial variables suggesting that the two types of variables are complements.

Keywords: Biotechnology, Financial and Non-Financial Information, R&D Expenditures, Sophisticated Investors

JEL Classification: M41, L65