Unwanted Side-Effects: Idiosyncratic Volatility and M&A Activity in the U.S. Biopharmaceuticals Industry

Abstract: In this paper we use the disaggregated approach as outlined by Campbell et al. (2001) to study the volatility of firms within the U.S. pharmaceutical and biotech industry at the market, industry and firm levels. We construct volatility series for a period of 26 years from 1990 to 2015, and find that as expected, there are high levels of idiosyncratic volatility for the average biopharmaceutial firm. There are large variations in volatility over the period, with significant spikes at events such as milestones within regulation and financial crises. There is a high correlation between the series. We attempt to relate the identified volatility series to the booming M&A activity within the industry, and we find a significant relationship between M&A activity and firm level volatility.