Abstract
This paper analyzes stock returns for biotechnology firms after initial public offering (IPO) and explores the effect of social media—specifically, Twitter—on these returns. The results indicate positive yet insignificant cumulative average abnormal returns (CAARs) of 1.97% in the first 25 days post-IPO and a decline of tens of percentage points over the following three years. However, after dividing the sample firms into two subsamples according to size, either under or over USD 500 million in market value, the overall results change dramatically. Firms with a market value lower than USD 500 million yield negative CAARs immediately following the IPO; however, this negative CAAR becomes significant only from day 50 onward. Firms with a market value over USD 500 million yield positive CAARs immediately following the IPO, which become significant from day 50, remaining so throughout the following year. These findings can be attributed to the limited duration of investors’ attention, which increases until the end of quiet period and, with small-sized firms, diminishes during the post-IPO years. An examination of Twitter activity and share returns demonstrates a robust correlation between the two, suggesting that investors’ attention to firms may be reflected in their Twitter usage.
Highlights
The pharmaceutical industry develops, produces, and markets drugs to be used as medications
While there have been numerous studies of many diverse issues involving initial public offering (IPO), the literature most closely related to this study has focused on the performance of stocks issued in the United States for up to three years following IPOs and factors that may potentially affect the performance of these stocks
The cumulative average abnormal returns (CAARs) results are shown using two return benchmarks, and they were calculated for the entire sample and the subsamples of small-sized firms and large-sized firms with market capitalization of up to USD 500 million (68% of the sample) and higher than USD 500 million (32% of the sample), respectively
Summary
The pharmaceutical industry develops, produces, and markets drugs to be used as medications. I analyze the relationship between stock returns and investors’ attention as reflected in the volume of discourse on Twitter. Numerous studies have attempted to explore variables that could potentially influence stock prices following an IPO. Some of these have examined the issue of media coverage, including press releases and other coverage initiated by the firm, as well as publications and material originating outside the firm. Very few studies have investigated the relationship between social media usage and post-IPO stock returns. 2013 and 2019, following the enactment of the JOBS Act. The first part of the paper examines how the JOBS Act influenced investors’ activity during the three years following IPOs, as reflected in the cumulative average abnormal return (CAAR) for the stock’s price.
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