Voluntary disclosure and its impact on share prices: Evidence from the UK biotechnology sector

Valuation implications of pharmaceutical companies' R&D regulatory approval notifications

“…As expected, approvals significantly increase shareholder wealth in both markets, but applications are only value-relevant for NYSE firms. For the UK, a significant market reaction around approvals is consistent with Dedman et al (2008), who conclude that UK investors demand further progress through the drug development process before they capitalise R&D expenditures.…”

“…Conventional equity valuation models are difficult to apply, owing to the complexity of the science underpinning products and technologies developed, long development lead times, significant ongoing capital requirements, complex intellectual property issues and regulatory hurdles. These issues are particularly acute for the many small and medium sized enterprises (SMEs) in this industry which represent the vast majority of firms in the UK (Dedman et al, 2008 From an economic perspective, well-functioning capital markets require resolution of the information, or "lemons", problem (Akerlof, 1970). Corporate disclosure solves this problem in capital markets and has been categorised into mandatory regulated financial statements and voluntarily disclosed information, with external information intermediaries such as financial analysts also reducing the information gap (Healy & Palepu, 2001).…”

“…An announcement of a firm's success, at any stage of the drug development process, is at the discretion of management and, as such, falls into the voluntary disclosure category and is classified in the literature as a non-financial performance indicator. More specifically, the decision to disclose voluntary information related to the drug development process is modelled within a game-theoretic context (Dedman et al, 2008). The argument is that voluntary disclosure is a special case of game theory, where an entity will disclose positive information while suppressing negative information, an outcome of the entity's optimising behaviour (Dye, 2001).…”

“…In the pharmaceuticals sector, drug-inprogress announcements are a significant performance indicator and have been shown to significantly increase shareholder wealth along the various stages of the explorationexploitation continuum (McNamara & Baden-Fuller, 2007;Dedman, Lin, Prakash & Chang, 2008). In such an environment, the need to attract and maintain investor confidence is a nonnegotiable requirement, of which the pharmaceuticals sector is acutely aware.…”

“…Third , it is common practice in the literature to report the mean abnormal return on the event day, and cumulative abnormal returns (CARs) for various holding periods, typically centred on the event day ( e.g. two days' CAR from day 0 to +1 ) [McNamara & Baden-Fuller, 2007;Dedman, Lin, Prakash & Chang, 2008]. Given the reported significance of the mean and CARs, it is evident that a post-event market reaction occurs.…”