Do investors overreact to negative clinical trial results in the biotechnology industry?

Abstract: Using all of the 177 biotech companies listed on the NASDAQ stock exchange at some point in time during the years 2008 - 2010 and their clinical trial results, we test if investors overreact to the initial publication of negative clinical trial results. In contrast to other studies we choose to investigate only negative clinical trial results as previous studies, carried out in other industries, have found a larger impact for negative news than for positive news. Further as negative clinical trial results are harder to obtain, most studies testing the implications of clinical trial results, focus only on positive clinical trial results. We test for cumulative abnormal returns over a post-announcement period of up to two years. Our results indeed indicate abnormal returns for the event-companies. These occur mainly in the 4th and 5th post-event quarter. We find significant abnormal returns for companies that trade close to net cash after the negative clinical trial result but still have a significant amount of remaining pipeline compounds. Hence, we conclude that investors on average overact to negative clinical trial results for certain types of companies and that exploitable price reversals are present.