Contagious Speculation & A Cure For Cancer: A Non-event that Made Stock Prices SoarTHE JOURNAL OF FINANCE Vol. LVI, no.1 • Feb 2001

Findings of Paper

• The Efficient-Markets Hypothesis’ assumption that Stock Prices are some how linked to New Market information may not hold true always.

• Movements of Stock Prices may be concentrated in stocks that have some things in common, but these need not be economic fundamentals.

• Capital markets may allocate funds in a somewhat arbitrary fashion.

Observations• On May 3 1998, a New York Times Edition report on the recent breakthrough in Cancer

Research and mentions Entre Med (ENMD),a company with the Licensing rights to breakthrough.

• The impact of the new on stock prices was of ENMD was immediate, huge and largely permanent.

• The interesting fact is this is Not a new News, as the substance of this news was already published in Scientific Journal ‘Nature’ (Boehm et al(1997))

• It is observable that a Five month old news is making an impact with the same intensity as that of new one.

• Causing the Stock Prices to rise more than double , on permanent basis.

• It appears that Market Under-reacted to the new in Nov 1997 and Over reacted to the same on the publicity given by New York Times on May 3,1998.

Observation (Contd.)

• ENMD’s stocks that have closed at 12.063 before the article appeared, opened at 85 and closed at 51.81 on May 4,1998.

• Prices did fell subsequently after Nov 12 1998, around 24.875,but they were still twice the closing price prior to the Times article that appeared on May 4 ,1998.

• The puzzle gets magnified when we consider what happened to other Biotechnology stocks on May 4,1998.

• The returns of 7 members of NASDAQ Biotech Combined Index went 7.5 %

• The return of 7 stocks in index exceeded 25% on a trading volume which is 50 times the average daily volume, whereas previously when the news first came in Nov 28 1997 it was only 4.89 percent.

Conclusion

Prices probably move on even when there is no new News.

Possible arbitrariness of stock prices implies capital markers may allocate funds in arbitrary fashion.

Stock Prices may well be based on the expectations of future cash flow based on just spurious publicity.

Market can Under-react or Over-react to announcement.

References

• Boehm, Thomas, Judah Folkman, Timothy Browder, and Michael S. O’Reilly, 1997, Antiangio- genic therapy of experimental cancer does not induce acquired drug resistance, Nature 390, 404–407.

• Kolata, Gina, 1998, Hope in the lab: A special report; A cautious awe greets drugs that eradicate tumours in mice, New York Times, May 3, 1:1.

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