Regulatory Changes in the Pharmaceutical Industry

In August of 1997, the Food and Drug Administration (FDA) set new less restrictive guidelines for direct-to-consumer (DTC) advertisements by pharmaceutical companies. I examine the common stock price reaction of pharmaceutical companies following the announcement of new FDA guidelines on advertising. Positive announcement effects are found for the pharmaceutical industry following the FDA announcement. Evidence suggests that innovative firms emphasizing research and development (R&D) are more likely to capitalize on DTC advertising and benefit the most from the less restrictive guidelines of the FDA regarding DTC advertisements