The Information Effect of FDA Approval Announcements on Pharmaceutical and Bio-Health Companies’ Stock Prices

Korean pharmaceutical and bio-health companies began applying for FDA approval in 2000. However, drug companies in South Korea are not required to obtain FDA approval to market their products on the South Korean market, and the approval process is highly resource-intensive. This study utilizes event study methodology to examine the information effect of US FDA approval announcements on the stock prices of pharmaceutical and bio-health companies listed on South Korean stock markets. The study’s results show that FDA approval announcements caused abnormal increases in corporate stock prices, indicating that these announcements have a transnational information effect on South Korean companies’ value. Furthermore, the results show that the impact of FDA approval announcements on stock prices is greater for small companies than mid-sized and large companies and in bio and healthcare industries than in the traditional pharmaceutical industry. This impact is also more significant on the KOSDAQ (Korea Securities Dealers Automated Quotation) companies than the KOSPI (Korean Composite Stock Price Index) companies and after the expansion of stock price limits. These findings signal that the information effect is more significant when regulatory controls are weaker. The results also indicate that obtaining FDA approval brings above-normal returns for companies and that FDA application is a high-risk, high-return investment.