Drug approval decisions: A note on stock liquidity effects

We analyze the relationship between positive stock returns, changes in trading activities, and liquidity improvements following drug approval announcements. Using a unique hand-collected data set on approval decisions in Europe, we find that stock liquidity does change. Stocks temporarily exhibit strong abnormal trading volume, lower spreads, and permanently become more liquid. Our results suggest that the initial positive wealth effect of a new drug release reflects both positive information content and liquidity improvements.

► We analyze liquidity effects following new drug approvals.
► We use a unique hand-collected data set on new drug approvals in Europe.
► Companies exhibit abnormal stock returns and stock liquidity improvements.