How Good Is Good News? Technology Depth, Book-to-Market Ratio, and Innovative Events

This paper examines the stock market reactions to the U.S. biotech firmsʹ innovation news announcements during 1983-93. In addition to the positive abnormal returns observed during the announcement period, the paper identifies a medium-horizon negative drift in the stock price subsequent to firmsʹ innovative events. The observed negative drift is robust to the benchmarks and procedures used in calculating the abnormal returns. Cross-sectional analysis demonstrates that the postannouncement abnormal returns are positively related to a firmʹs technology depth (measured by research and development [R&D] intensity) and book-to-market ratio, negatively related to the size. The evidence favors the investor expectational errors hypothesis and suggests that R&D or other intangibles are market-value relevant in the high-tech firms.