This study examines short- and long-horizon contrarian and momentum investing strategies following R&D announcements to provide insights into the way security prices respond after corporate R&D announcements in the context of the biotech industry.
On January 9, 2014, Intercept Pharmaceuticals rose almost fourfold after the New York-based company said its lead drug to cure a rare form of liver disease worked so well in a mid-stage trial that the study was halted early. Did the news announcement provide an investment opportunity or did the stock markets overreact?
In this study, we seek to explore how security prices behave following large (one-day) movements using a sample of more than 3,000 R&D announcements made by US biotechnology firms during 2006-2017. We examine both over a short horizon (intraday) as well as over a long horizon.
Does a large one-day movement provide the opportunity for a short-term profitable trading strategy based on stock market overreaction? Is there a difference between large one-day declines vs. inclines? Do stocks with greater initial large movements have bigger subsequent reversals? Is there a difference between small vs. large firms? Does the size of the cash balance or the depth of the R&D pipeline impact the results? Does the information content (e.g. primary, secondary endpoints et.c.) in the news announcements play a role in explaining security price behavior?