Open Access Journal Article

The Effect of Public Contract Winning Announcements on Share Prices: An Event-Based Study on the Pharmaceutical Industry

by Eyden Samunderu a orcid  and  Anita Yordanova a,* orcid
a
International School of Management – (ISM), Dortmund, Germany
*
Author to whom correspondence should be addressed.
JEA  2024, 43; 3(1), 43; https://doi.org/10.58567/jea03010001
Received: 2 June 2023 / Accepted: 15 June 2023 / Published Online: 1 March 2024
View Full-Text
Download PDF

Abstract

The purpose of this paper is to examine and elucidate the effect of the announcement of winning a US federal contract by pharmaceutical companies, traded on the NASDAQ stock exchange on the share prices. The analysis is based on a sample of 327 event days from 12 pharmaceutical companies listed on the NASDAQ market for a given period (2010 – 2021). The sample is analysed by using the event study methodology and Capital Asset Pricing Model (CAPM) in order to examine the abnormal returns and cumulative abnormal returns during an event window of 10 days before the event and 10 days after the event. While prior researchers have identified significant positive abnormal returns following different types of contract announcements, this study aims to contribute to the existing literature by exploring the specific impact of the public contract in the pharmaceutical market on market shares. By investigating this unique aspect, the research fills a gap in previous studies and enhances our understanding of the relationship between public contract announcements and market performance. The data collection utilises secondary data from the official open data source of US federal spending information and daily stock prices. The collected data is analysed quantitatively using event study methodology, allowing for statistical examination of abnormal returns, such as ANOVA analysis, t-statistic, beta index, time series analysis and linear regression. The research findings indicate a significant impact of public contract-winning announcements on cumulative abnormal returns, suggesting a positive reaction from the market. However, average abnormal returns within the event window were positive but not statistically significant. These results imply that winning a government contract has a limited impact on the stock market. The implications of this research highlight the importance of public contract announcements in the pharmaceutical industry and their influence on share prices. The findings provide valuable insights for investors and stakeholders, aiding decision-making processes related to investment opportunities and market performance.

Keywords: Public contract winning announcement; Stock market; Pharmaceutical industry; Event study; Abnormal returns; Capital Asset Pricing Model (CAPM); NASDAQ market; Share prices; Investor behaviour;
Copyright: © 2024 by Samunderu and Yordanova. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
Show Figures

Share and Cite

ACS Style
Samunderu, E.; Yordanova, A. The Effect of Public Contract Winning Announcements on Share Prices: An Event-Based Study on the Pharmaceutical Industry. Journal of Economic Analysis, 2024, 3, 43. https://doi.org/10.58567/jea03010001
AMA Style
Samunderu E, Yordanova A. The Effect of Public Contract Winning Announcements on Share Prices: An Event-Based Study on the Pharmaceutical Industry. Journal of Economic Analysis; 2024, 3(1):43. https://doi.org/10.58567/jea03010001
Chicago/Turabian Style
Samunderu, Eyden; Yordanova, Anita 2024. "The Effect of Public Contract Winning Announcements on Share Prices: An Event-Based Study on the Pharmaceutical Industry" Journal of Economic Analysis 3, no.1:43. https://doi.org/10.58567/jea03010001
APA style
Samunderu, E., & Yordanova, A. (2024). The Effect of Public Contract Winning Announcements on Share Prices: An Event-Based Study on the Pharmaceutical Industry. Journal of Economic Analysis, 3(1), 43. https://doi.org/10.58567/jea03010001

Article Metrics

Article Access Statistics

References

  1. Abdurakhmonov, M., Ridge, J. W., & Hill, A. D. (2021). Unpacking firm external dependence: How government contract dependence affects firm investments & market performance. Academy of Management Journal, 64(1), 327-350. https://doi.org/10.5465/amj.2018.0067
  2. Afego, P. N. (2013). Stock price response to earnings announcements: Evidence from the Nigerian stock market. Journal of African Business, 14(3), 141-149. https://doi.org/10.1080/15228916.2013.844008
  3. Agrawal, M., Kishore, R., & Rao, H. R. (2006). Market reactions to e-business outsourcing announcements: An event study. Information & Management, 43(7), 861-873. https://doi.org/10.1016/j.im.2006.08.002
  4. Ali, N. P., & Saha, A. (2021). Market Efficiency of Indian Capital Market: An Event Study around the Announcement of Results of Lok Sabha Election 2019. International Journal of Financial Research, 12(1), 60-70. https://doi.org/10.5430/ijfr.v12n1p
  5. Asamoah, G. N., & Nkrumah, K. (2010). The impact of dividend announcement on share price behaviour in Ghana. Journal of Business & Economics Research, 8(4), 47-58. https://doi.org/10.19030/jber.v8i4.702
  6. Burton, B. M., Lonie, A. A., & Power, D. M. (2000). The impact of corporate growth opportunities on the market response to new equity announcements. Applied Financial Economics, 10(1), 27-36. https://doi.org/10.1080/096031000331897
  7. Campbell, J.Y., & Jianping Mei. (1993). "Where do betas come from? Asset price dynamics & the sources of systematic risk." The Review of Financial Studies, 6(3), 567-592. https://doi.org/10.1093/rfs/5.3.567
  8. Capelle-Blancard, G., & Couderc, N. (2008). What drives the market value of firms in the defense industry? Review of Financial Economics, 17(1), 14-32. https://doi.org/10.1016/j.rfe.2007.02.001
  9. Chang, S. J., & Chen, S. N. (1989). A study of call price behavior under a stationary return generating process. Financial Review. https://doi.org/10.1111/j.1540-6288.1989.tb00346.x
  10. Choi, J. (2014). Effects of contract announcements on the value of construction firms. Journal of Management in Engineering, 30(1), 86-96. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000178
  11. Dasilas, A., & Leventis, S. (2011). Stock market reaction to dividend announcements: Evidence from the Greek stock market. International Review of Economics & Finance, 20(2), 302-311. https://doi.org/10.1016/j.iref.2010.06.003
  12. Daud, K. A. M., Khidzir, N. Z., Ismail, A. R., & Abdullah, F. A. (2018). Validity & reliability of instrument to measure social media skills among small & medium entrepreneurs at Pengkalan Datu River. International Journal of Development and Sustainability, 7(3), 1026-1037.
  13. Dedunu, H. H. (2018). Impact of dividend announcement on share price: Evidence from Colombo Stock Exchange. International Journal of Management Sciences and Business Research, 7(12), 1-7.
  14. Diltz, J. D. (1990). Valuation effects of government contract awards. Quarterly Journal of Business and Economics, 3- 15. https://www.jstor.org/stable/40472995
  15. Duppati, G., Abidin, S., & Hu, J. (2015). Do mergers & acquisitions in China create value to acquiring firms? Corporate Ownership and Control, 12(4), 117-140. https://doi.org/10.22495/cocv12i4p9
  16. Dz aja, J., & Aljinovic , Z. (2013). Testing CAPM model on the emerging markets of the Central & South-eastern Europe. Croatian Operational Research Review, 4(1), 164-175. https://hrcak.srce.hr/file/143353
  17. Elayan, F. A., Pukthuanthong, K., & Roll, R. (2006). Investor Reaction to Inter-corporate Business Contracting: Evidence & Explanation. Economic Notes, 35(3), 253-291. https://doi.org/10.1111/j.1468-0300.2006.00166.x
  18. Elayan, F., Pukthuanthong, K., & Li, J. (2004). The Valuation Effect & Determinants of Corporate Contracting, SSRN Working Paper Series, Rochester: 2004.
  19. Elayan, F., Pukthuanthong, K., & Li, J. (2011). The Determinants & Impact of Government Contract Award on the Market Value of the Winning Firms.
  20. Elbannan, M. A. (2015). The capital asset pricing model: an overview of the theory. International Journal of Economics & Finance, 7(1), 216-228. https://doi.org/10.5539/ijef.v7n1p216
  21. Fama, E. F. (1970). Efficient capital markets: A review of theory & empirical work. The journal of Finance, 25(2), 383- 417. https://doi.org/10.2307/2325486
  22. Fama, E. F., & MacBeth, J. D. (1973). Risk, return, & equilibrium: Empirical tests. Journal of political economy, 81(3), 607-636.
  23. Federal Acquisition Regulation (FAR) (2014). 48 Code of Federal Regulations (CFR) § 5.303.
  24. Fery, J., Gasbarro, D., Woodliff, D. R., & Zumwalt, J. K. (2003). Market reaction to published & non-published corporate loan announcements. The Quarterly Review of Economics & Finance, 43(1), 1-10. https://doi.org/10.1016/S1062-9769(02)00118-7
  25. Firth, M. (1976). The impact of earnings announcements on the share price behaviour of similar type firms. The Economic Journal, 86(342), 296-306. https://doi.org/10.2307/2230748
  26. Gupta, S., Dogra, B., Vashisht, A. K., & Ghai, S. (2012). Stock Price Reaction to Dividend Announcements. International journal of financial management, 2(2).
  27. Gurgul, H., Mestel, R., & Schleicher, C. (2003). Stock market reactions to dividend announcements: Empirical evidence from the Austrian stock market. Financial Markets & Portfolio Management, 17(3), 332. https://doi.org/10.1007/s11408-003-0304-1
  28. Hanvanich, S., & Çavuşgil, S. T. (2001). Stock market reactions to international joint venture announcement: An event analysis. International Business Review, 10(2), 139-154. https://doi.org/10.1016/s0969-5931(00)00048-2
  29. Ika heimo, S., Kjellman, A., Holmberg, J., & Jussila, S. (2004). Employee stock option plans & stock market reaction: evidence from Finland. The European Journal of Finance, 10(2), 105-122. https://doi.org/10.1080/1351847032000137447
  30. Jensen, M. C., Black, F., & Scholes, M. S. (1972). The capital asset pricing model: Some empirical tests. https://ssrn.com/abstract=908569
  31. Karakuş, R. (2017). The Effect of Contract Winning Announcement on the Market Value of Firms: An Empirical Research in Borsa Istanbul. The Journal of International Scientific Researches, 1–10. https://doi.org/10.23834/isrjournal.342052
  32. Kisman, Z., & Restiyanita, S. (2015). M. The Validity of Capital Asset Pricing Model (CAPM) & Arbitrage Pricing Theory (APT) in Predicting the Return of Stocks in Indonesia Stock Exchange. American Journal of Economics, Finance and Management, 1(3), 184- 189.
  33. Kumar Pradhan, S., & Kasilingam, R. (2016). Impact of buyback announcement on share price: A company & industry wise analysis. International Journal of Management & Business Research, 6(1), 13-21.
  34. Langmann, C. (2007). Stock market reaction & stock option plans: Evidence from Germany. Schmalenbach Business Review, 59, 85-106. https://doi.org/10.1007/bf03396743
  35. Larson, S. J., & Picou, A. (2002). The market's response to contract award announcements: government versus corporate contracts. Journal of Public Procurement. https://doi.org/10.1108/jopp-02-02-2002-b004
  36. Lee, P. M. (1997). A comparative analysis of layoff announcements & stock price reactions in the United States & Japan. Strategic Management Journal, 18(11), 879-894. https://doi.org/10.1002/(sici)1097-0266(199712)18:11<879::aid-smj929>3.0.co;2-v
  37. Loewenstein, G. F., Weber, E. U., Hsee, C. K. & Welch, N. (2001), Risks as Feelings, Psychological Bulletin 127, 267-286. https://doi.org/10.1037/0033-2909.127.2.267
  38. Lonkani, R., Changchit, C., & Satjawathee, T. (2012). Examining of the Effects of Business Contract Announcements on Stock Prices in Thailand. International Research Journal of Finance & Economics, 93, 67–83.
  39. Ma, J., Pagan, J. A., & Chu, Y. (2009). Abnormal Returns to Mergers and Acquisitions in Ten Asian Stock Markets. International Journal of business, 14(3).
  40. NASDAQ (2012): Nasdaq Listing Standards & Fees May 2010, NASDAQ Website, https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%205200%20Series
  41. Neuhierl, A., Scherbina, A., & Schlusche, B. (2013). Market reaction to corporate press releases. Journal of Financial & Quantitative Analysis, 48(4), 1207-1240. https://doi.org/10.2139/ssrn.1556532
  42. Owusu, F., Gyau, E. K., & Amaning, N. (2016). The effect OF earnings announcement ON share price OF manufacturing companies ON the Ghana stock exchange. European Journal of Accounting, Auditing & Finance Research, 4(6), 96-111. ISSN 2054-6327(online)
  43. Parveen, S., Satti, Z. W., Subhan, Q. A., & Jamil, S. (2020). Exploring market overreaction, investors' sentiments & investment decisions in an emerging stock market. Borsa Istanbul Review, 20(3), 224-235. https://doi.org/10.1016/j.bir.2020.02.002
  44. Pettit, R. R., & Westerfield, R. (1974). Using the capital asset pricing model & the market model to predict security returns. Journal of Financial & Quantitative Analysis, 9(4), 579-605. https://doi.org/10.2307/2329762
  45. Rosen, R. J. (2006). Merger momentum & investor sentiment: The stock market reaction to merger announcements. The Journal of Business, 79(2), 987-1017. https://doi.org/10.1086/499146
  46. Rossi, M. (2016). The capital asset pricing model: a critical literature review. Global Business and Economics Review, 18(5), 604-617. https://doi.org/10.1504/GBER.2016.10000254
  47. Shafiq, S., & Qureshi, S. S. (2022). Impact of budget announcement on stock returns: An Event Study in Pharmaceutical & Automobile sector. GMJACS, 12(1), 14-14. https://doi.org/10.59263/gmjacs.12.01.2022.219
  48. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
  49. Song, C., & Han, S. H. (2017). Stock market reaction to corporate crime: Evidence from South Korea. Journal of Business Ethics, 143, 323-351. https://doi.org/10.1007/s10551-015-2717-y
  50. Sorescu, A., Warren, N.L. & Ertekin, L. (2017). Event study methodology in the marketing literature: An overview. Journal of the Academy of Marketing Science 45, 186–207 DOI:10.1007/s11747-017-0516-y
  51. Syed, A. M., & Bajwa, I. A. (2018). Earnings announcements, stock price reaction & market efficiency–the case of Saudi Arabia. International Journal of Islamic & Middle Eastern Finance & Management. DOI:10.1108/IMEFM02-2017-0044
  52. United States. (n.d.). USAspending.gov. Retrieved October 8 2022 from https://purl.fdlp.gov/GPO/LPS91044
  53. Woolridge, J. R., & Snow, C. C. (1990). Stock market reaction to strategic investment decisions. Strategic management journal, 11(6), 433-448.
  54. Yang, J., Lu, W., & Zhou, C. (2014). The immediate impact of purchasing/sales contract announcements on the market value of firms: An empirical study in China. International Journal of Production Economics, 156, 169-179. DOI:10.1016/j.ijpe.2014.06.002