Gradual incorporation of information: Pharmaceutical stocks and the evolution of President Clinton's health care reform

We examine the effect of the evolution of President Clinton's health care r eform proposal over January 1992-October 1993 on pharmaceutical stock price s. We identify a 52.3 percent decline in market-adjusted prices, which we t hen associate with health care reform. Applying a new technique, isotonic r egression, we find most of the decline occurred gradually. Much of the decl ine occurred as the Clinton plan adopted strategies to contain health care costs, including "managed competition" and implicit regulation. Indirect ev idence suggests that the wealth lost by pharmaceutical companies may have b een largely an anticipated transfer. Our results are relevant to understand ing the likely effects of the Clinton plan and more recent proposals. Many other policy changes are marked by gradual public revelation of information , which may not be completely observable by a researcher. Our approach may uncover information about the anticipated effects of policies unavailable f rom a traditional event study.