Information Uncertainty, Capricious Behavior, and Share Price Volatility: Evidence from the Biotech Industry

Abstract

Capricious market behavior is theoretically documented in the literature as a competing description of investors' behavior in terms of response to new information. Empirical evidence on the existence of this behavioral bias is rather limited. Moreover, causes of this behavior and its effect on market variables are largely unexplored. In the setting of the biotech industry which is characterized by high share price volatility, I find information uncertainty causes capricious market expectation revisions, which results in high share price volatility. Biotech firms in fact face a dilemma. While no or less information disclosure can lead to high information asymmetry, more disclosure of uncertain information may fail biotech firms to benefit from information disclosure as share price volatility is found empirically positively correlated with information asymmetry measures. Moreover, I find information uncertainty is a function of a drug's development advancement, the nature of R&D progress and the hardness of the news.