The Economic Side Effects of Dangerous Drug Announcements

Immediately prior to the passage of the 1962 Food and Drug Administration Amendments, there were a number of drugs recalled from markets worldwide. Announcements about the dangerous side effects of these drugs were associated with lower-share prices for their manufacturers and the industry as a whole. We perform several analyses to sort out alternative explanations for the observed declines. We find that dangerous drug announcements had no effect on the sales of other drugs and didn't affect the share values of European drug makers doing little business in the U.S. We also find that share-price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs. These patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new (and more stringent) drug-testing requirements. Copyright 1994 by the University of Chicago.