How Good is Good News? Technology Depth, Book-to-Market Ratios, and Innovative Events

48 Pages Posted: 27 Dec 2000

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Date Written: April 2000

Abstract

Using a sample of 611 innovation news announcements made by US biotech firms during 1983-1992, this article finds positive abnormal returns and trading volumes during the announcement period. In contrast with most other studies on long-run stock performance, a long-run negative drift in the stock price subsequent to firms' innovative events is documented. The observed negative drift is robust to benchmarks and procedures used in calculating the long-term abnormal returns. The cross-sectional analysis demonstrates that the post-announcement abnormal returns are positively related to a firm's technology depth (measured by R&D intensity) and book-to-market ratio, negatively related to the size. The evidence supports the investors' expectation error hypothesis: given high degree of technical uncertainty concerning a firm's innovative events, investors easily develop erroneous expectation about the value of the innovations. As event time goes, more information is revealed. Investors start to correct the mistakes in their initial responses. Firms that were badly mispriced at the beginning tend to have large long-run negative drift. Large firms, the firms with low B/M ratios, and firms with weak science and technology base are more likely to be mispriced at the announcement.

Keywords: Innovative events, abnormal returns, long-term anomaly, technology depth, size, book-to-market ratios, expectation errors, and firm-specific fundamentals

JEL Classification: G12, G14, G24, G34

Suggested Citation

Liu, Qiao, How Good is Good News? Technology Depth, Book-to-Market Ratios, and Innovative Events (April 2000). Available at SSRN: https://ssrn.com/abstract=248909 or http://dx.doi.org/10.2139/ssrn.248909

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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