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: 17 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

Abstract

We analyze, theoretically and empirically, how salience affects the market reaction to innovation announcements. Hypothesizing that equity market investors pay more attention to more salient announcements, we develop a dynamic model with limited investor attention of patent grant and FDA drug approval announcements. We show that, in addition to an announcement effect, there will be a stock return drift following innovation announcements, with the former magnitude increasing and the latter magnitude decreasing with investor attention. Testing model predictions using a matched sample of biopharmaceutical industry patent grant and subsequent FDA drug approval announcements, we find results consistent with model predictions.

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

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. Available at SSRN: https://ssrn.com/abstract=4543810 or http://dx.doi.org/10.2139/ssrn.4543810

Thomas J. Chemmanur (Contact Author)

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

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

Fayetteville, AR 72701
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
39
Abstract Views
331
PlumX Metrics