Wealth Effects of the Pharmaceutical Industry-Physician Interaction Compliance Guidelines on Large Pharmaceutical Companies

The purpose of this paper is to investigate the wealth effects of the issuance of guidelines by the Office of Inspector General (OIG) to encourage pharmaceutical manufacturers to use internal controls or self-regulation “to efficiently monitor adherence to applicable statutes, regulations, and program requirements” in their marketing to the physicians. The authors employ a standard event-study methodology to examine the impact on shareholders of 12 large pharmaceutical firms around four events leading up to the final guidance issued by the OIG. The overall results indicate a net wealth loss for the sample firms. Interpretation of results warrants caution since the sample is biased toward large multinational pharmaceutical firms that are listed on the USA stock exchanges. The issuance of high-level government policy initiative triggers a pharmaceutical industry response that in turn mitigated firms' questionable marketing practices. The government accomplishes this without instituting regulation but by taking the dialogue to a wide-ranging and highly public forum. The empirical results suggest that a public policy initiative that impacts shareholder wealth could alter firm (industry) behavior thereby sparing government from enacting regulation and potentially saving exorbitant regulatory enactment, enforcement, and policing costs. The results also provide credence to the argument that the hybrid systems, ones that combine industry rule making with government oversight, provide the greatest potential for overall benefits to society