Gradual incorporation of information

Information moves stock prices. A vast literature has arisen to exploit and explain that fact. Applied researchers in a variety of fields have used stock market reactions to assess public policy changes. Most of that research has assumed that the information is released on a small set of observable dates. But for many public policy changes, information is often revealed not in one announcement but rather through a process of gradual public revelation, which may not be completely observable by a researcher. We examine the effect of the evolution of the Clinton healthcare reform proposal on pharmaceutical stock prices. Applying a new technique, isotonic regression, over January 1992 to October 1993, we find that the major portion of the decline in stock prices occurred gradually, and did not correspond to identified news events. Strikingly, 85% of the total effect of the healthcare reform on stock prices was incorporated by February, 1993, nearly seven months before the Clinton plan was formally unveiled to Congress. Keywords: Pharmaceutical industry; isotonic regression; stock market information.