Regulatory Threats and Political Vulnerability

During the 1992 U.S. presidential campaign and immediately after, the pharmaceutical industry was subjected to regulatory threats. It was charged with high drug costs, high advertising expense, and insufficient expenditure on research and development (R&D) to develop better drugs. We examine whether firms' measures of political vulnerability (higher advertising expense and lower R&D expenditure) influence the equity value effects of the regulatory threats. We find negative announcement effects around three regulatory threats. We then extend the analysis and find evidence consistent with our hypotheses that measures of political vulnerability are associated with more negative abnormal returns in response to the regulatory threats. JEL classification: G18, L50, L65.