UMass Researchers Say Negative FDA Decisions on New Drugs Have Significant Impact on Stock Prices

AMHERST, Mass. - Researchers at the University of Massachusetts say company stock prices drop sharply following rejection of new drugs by the federal Food and Drug Administration (FDA), and that the announcement of the rejection made by the company, not the agency, apparently prompts instances of illegal insider trading. With Congress investigating alleged insider trading by officials at ImClone Systems following FDA rejection of an important cancer-fighting drug, the UMass team says its initial findings are timely and significant.

The research is being conducted by Nelson Lacey and Anurag Sharma, professors at the Isenberg School of Management at UMass, into key decisions by the FDA and the resulting effect on the company’s stock price. They find that the FDA’s decision to reject a new drug application is associated with a monstrous drop in market value of those companies. The study is slated for release this fall.

"For our sample of 41 outright rejections by the FDA during the 1990s, we find that the stock price for the sample falls on average by 11.2 percent on the day of the public announcement, and by another 5.9 percent on the next trading day," Lacey and Sharma say. "This is consistent with the efficient markets hypothesis– that unanticipated information is quickly incorporated into stock prices."

But there is also evidence that the way FDA decisions are made public has a troubling effect, Lacey and Sharma say. "Surprisingly, we also find that the value of those same company’s shares falls by an average of 4 percent one day before the announcement is made public. This suggests that insiders are learning of the impending bad news, and are perhaps dumping the stock in advance of making that news public." This finding suggests that perhaps some private information is being incorporated into stock prices before that (bad) news becomes publicly available. If true, such inefficiency in the markets raises serious issues about how FDA decisions reach the investing public.

Theresearchers find that, by and large, the FDA does an effective job in keeping these key decisions under tight wrap. "One of the surprising elements of our findings is that in general, the market does not anticipate the FDA decisions until the companies themselves release the news conveyed to them privately – even though these decisions are often turning points in the long term viability of the company. Still, for markets to work efficiently, there should be no leakage even one day before the news is made public by the management of the company."

Contact Nelson Lacey at 413/545-5630, 413/549-0624 or

Anurag Sharma can be reached at 413/545-5682 or