Contagious Speculation & A Cure For

Cancer: A Non-event that Made
Stock Prices Soar
THE JOURNAL OF FINANCE
Vol. LVI, no.1 • Feb 2001
Findings of Paper
• The Efficient-Markets Hypothesis’ assumption that Stock Prices are some
how linked to New Market information may not hold true always.
• Movements of Stock Prices may be concentrated in stocks that have some
things in common, but these need not be economic fundamentals.
• Capital markets may allocate funds in a somewhat arbitrary fashion.

Observations
• On May 3 1998, a New York Times Edition report on the recent breakthrough in
Cancer Research and mentions Entre Med (ENMD),a company with the Licensing
rights to breakthrough.
• The impact of the new on stock prices was of ENMD was immediate, huge and
largely permanent.
• The interesting fact is this is Not a new News, as the substance of this news was
already published in Scientific Journal ‘Nature’ (Boehm et al(1997))
• It is observable that a Five month old news is making an impact with the same
intensity as that of new one.
• Causing the Stock Prices to rise more than double , on permanent basis.
• It appears that Market Under-reacted to the new in Nov 1997 and Over reacted
to the same on the publicity given by New York Times on May 3,1998.



Observation (Contd.)
• ENMD’s stocks that have closed at 12.063 before the article appeared, opened at
85 and closed at 51.81 on May 4,1998.
• Prices did fell subsequently after Nov 12 1998, around 24.875,but they were still
twice the closing price prior to the Times article that appeared on May 4 ,1998.
• The puzzle gets magnified when we consider what happened to other
Biotechnology stocks on May 4,1998.
• The returns of 7 members of NASDAQ Biotech Combined Index went 7.5 %
• The return of 7 stocks in index exceeded 25% on a trading volume which is 50
times the average daily volume, whereas previously when the news first came in
Nov 28 1997 it was only 4.89 percent.

Conclusion
Prices probably move on even when there is no new News.
Possible arbitrariness of stock prices implies capital markers may allocate
funds in arbitrary fashion.
Stock Prices may well be based on the expectations of future cash flow
based on just spurious publicity.
Market can Under-react or Over-react to announcement.
References
• Boehm, Thomas, Judah Folkman, Timothy Browder, and Michael S.
O’Reilly, 1997, Antiangio- genic therapy of experimental cancer does not
induce acquired drug resistance, Nature 390, 404–407.
• Kolata, Gina, 1998, Hope in the lab: A special report; A cautious awe greets
drugs that eradicate tumours in mice, New York Times, May 3, 1:1.