Biotechnological Patents Approval Risk and Stock Pricing

In the present paper we investigate the stock pricing of biotechnological companies around FDA announcements when the decisions on whether the drug is approved or not are made. We find a significant increase in uncertainty prior to these events, reflected in the higher levels of option-implied volatility and kurtosis and more negative skewness. We further show that biotechnological companies around FDA announcements represent a classical risk-reward relationship, with more negative abnormal skewness and more positive abnormal kurtosis being compensated with higher subsequent returns in a value-weighted portfolio. While this results do not hold for the abnormal volatility pri-or to the announcement, we interpret it as volatility being less efficient at explaining more extreme events. Skewness and kurtosis, however, being the measures of more tail-located risk, provide a higher explanatory power prior to the events with high informational content, than during ordinary non-announcement days.