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

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