The International Consortium on Agricultural Biotechnology Research (ICABR)


Changes in Market Valuation of Agricultural Biotechnological Innovations and Consolidation in the Industry

Norbert Wilson,
Auburn University

Anthony Artuso,
Rutgers University

John King,
Economic Research Service,


We utilize an event study approach to examine investor reactions to the release of key business information affecting agricultural biotechnology firms. A recent event study by Dohlman, Hall and Somwaru (2000) found that several regulatory decisions and food company announcements made during the fourth quarter of 1998 and early 1999 negatively affected the stock prices of agricultural biotechnology firms. We build upon this finding by examining the differential effects of informational events involving biotechnology firms from 1997 through 2000.

According to the efficient market theory, stock prices reflect all available information affecting the financial outlook of publicly traded companies. In addition, new information affecting the firm is rapidly incorporated into its stock price. In an event study, the researcher compares the expected rate of return for the stock of a particular company or group of companies with the observed rate of return immediately following one or more informational events. The comparison is of actual returns within a few days prior and immediately following an informational event (the event window). If the actual rate of return of a security in response to an informational event deviates from the predicted rate of return in a statistically significant way, then the null hypothesis that the event had no effect on the security is rejected.

The deviation of the observed rate of return from the predicted rate of return is defined as the abnormal return. We use a market index from an OLS model, a method similar to the calculations of the capital asset pricing model, to calculate the predicted return. If the cumulative abnormal return, the sum of abnormal returns within the event window, is statistically different than zero, then the test rejects the null hypothesis that the event had no effect on the quota. We use a t-test of the cumulative abnormal return to test the null hypothesis.

We calculate cumulative abnormal returns for events including patent awards, new product approvals, major licensing agreements, acquisitions, and joint ventures during several time periods from 1997 through 2000. The analysis sheds light on how investor valuation of agricultural biotechnology research and industry consolidation of and the effects on investor sentiment of information events that have affected public risk perceptions.

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