The Effect of Salience on the Equity Market Reaction to Innovation Announcements: Theory and Evidence from Patent Grants and FDA Drug Approvals

57 Pages Posted: 2 Aug 2023

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Kevin Tseng

The Chinese University of Hong Kong (CUHK) - CUHK Business School; National Taiwan University - Department of Finance

Yu (Yvonne) Wang

University of Arkansas, Fayetteville - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2023

Abstract

We analyze, theoretically and empirically, the implications of salience on innovation announcements in the biopharmaceutical industry. We hypothesize that equity market investors are more likely to pay attention to an innovation announcement that is more salient: thus, investors pay more attention to FDA drug approvals of pharmaceuticals compared to that paid to patent grant announcements of the same molecule. Based on this assumption, we develop a dynamic model with limited investor attention of patent grant and FDA drug approval announcements in the biopharmaceutical industry. We show that, in addition to an announcement effect, there will be a stock return drift following innovation announcements, with the magnitude of the former increasing and the latter decreasing in investor attention. We test model predictions using a matched sample of biopharmaceutical industry patent grant announcements and subsequent FDA drug approval announcements of the same molecule. Our empirical results are consistent with our model predictions.

Keywords: Salience, Investor Attention, Patent Grant Announcements, FDA Drug Approvals, Post-Announcement Stock Return Drift

JEL Classification: G14, G31, G41, O31

Suggested Citation

Chemmanur, Thomas J. and Li, Dongmei and Tseng, Kevin and Wang, Yu, The Effect of Salience on the Equity Market Reaction to Innovation Announcements: Theory and Evidence from Patent Grants and FDA Drug Approvals (July 22, 2023). Available at SSRN: https://ssrn.com/abstract=4519055 or http://dx.doi.org/10.2139/ssrn.4519055

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Kevin Tseng

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Yu Wang (Contact Author)

University of Arkansas, Fayetteville - Department of Finance ( email )

Fayetteville, AR 72701
United States

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