THE ECONOMIC SIDE-EFFECTS OF DANGEROUS DRUG ANNOUNCEMENTS

Immediately prior to the passage of the 1962 Food and Drug Administrat ion Amendments, there were a number of drugs recalled from markets wor ldwide. Announcements about the dangerous side effects of these drugs were associated with lower share prices for their manufacturers and th e industry as a whole. We perform several analyses to sort out alterna tive explanations for the observed declines. We find that dangerous dr ug announcements had no effect on the sales of other drugs and did not affect the share values of European drug makers doing little business in the United States. We also find that share price reductions associ ated with recalls in the 1970s and 1980s were confined to the manufact urers of the recalled drugs. These patterns are consistent with the hy pothesis that drug company shareholders viewed the recalls in the earl y 1960s as signals of an increase in the cost of compliance with new ( and more stringent) drug testing requirements.