This paper evaluates the impact of firm and drug attributes on the stock price movements of drug companies before, during, and after a drug approval decision by the Food and Drug Administration (FDA). Previous literature demonstrates significant stock price volatility around these events on average, but do not explicitly examine if certain attributes can help explain this volatility for individual companies. In this paper, holding period returns and cumulative abnormal returns (obtained via the Fama-French model) are regressed on relevant firm and drug attributes. The findings suggest that the type of disease a drug treats has little impact on its stock price return, while more novel drug application types have a positive effect on returns. Other variables have effects that vary depending on the time-period analyzed. Based on these findings, to maximize expected short-term returns, investors should only buy and hold a drug company stock before the FDA decision is announced. Investors should prioritize investing in companies that have not generated revenue and whose drug applications are Type 1 and have orphan designation.
Donovan, Julian, "The Impact of Drug and Firm Attributes on Stock Price Movements Around FDA Drug Approval Decisions" (2018). 2018 Undergraduate Awards. 18.