Negative Spillover in the Korean Biotech Industry: Evidence from the 2019 Bio-collapse in Korea

Abstract

This study examines the negative spillover in the Korean biotech industry. Using the event study method, we empirically demonstrate the spillover effect of SillaJen’s failure in global phase III clinical trials by examining negative stock market reactions on KOSDAQ. Within just six trading days after the R&D failure announcement, SillaJen’s market capitalization plunged by 68.7%, from KRW 3.16 trillion to KRW 0.99 trillion. In this study, we consider the negative spillover to the other biotech and pharmaceutical firms. Although SillaJen’s failure should not affect other firms’ fundamentals, their Cumulative Abnormal Returns (CARs) become significantly negative around the failure announcement. Especially, short-term average CARs of research-intensive biotech firms are more negatively affected by the announcement than those of pharmaceutical firms. However, the empirical results suggest that negative expectations about biotech firms spill over into traditional pharmaceutical firms over time.