The FOIA Requests and the Race Towards Information Acquisition

Antonio Gargano

University of Melbourne – Department of Finance

Alberto G. Rossi

University of Maryland – Department of Finance

Russ Wermers

University of Maryland – Robert H. Smith School of Business


We document a previously unknown source of information exploited by sophisticated institutional investors: the Freedom of Information Act, a law that allows for the full or partial disclosure of previously unreleased information and documents controlled by the United States government. Through our own FOIA requests we uncover the identities of several large institutional investors, chiefly hedge funds, that routinely request value-relevant information to the Food and Drug Administration. We first provide a detailed analysis of how FOIA requests are generated, the kind of information commonly requested by institutional investors and its costs. We then document that the target of FOIA requests are large firms that experience periods of low profitability and high stock price volatility. Finally, we show that FOIA requests allow institutional investors to generate abnormal portfolio returns and provide evidence suggesting that the FOIA information is not systematically known to other investors in the marketplace.

The FOIA Requests and the Race Towards Information Acquisition – Introduction

On July 4, 1966, President Lyndon B. Johnson signed the Freedom of Information Act (FOIA), a law that allows for the full or partial disclosure of previously unreleased information and documents in the domain of agencies of the Executive Branch of the United States government. It provides that any “person” (including U.S. citizens, foreign nationals, organizations, associations, and universities) has the right, enforceable in court, to obtain access to federal agency records, with some restrictions.1 While the practice of submitting FOIA requests is known to be common among news agencies and law firms, it is less known that, over the years, it has become a common approach for sophisticated institutional investors, such as hedge funds, to obtain potentially value-relevant information on corporations.

Specifically, institutional investors routinely take advantage of FOIA to acquire information from over forty-two federal agencies, such as the Food and Drug Administration, the Securities and Exchange Commission, the Environmental Protection Agency, and the Department of Energy. To a large extent, this should not be surprising. Being among the first to know that a pharmaceutical company receives warnings from the FDA, that an investment bank is under investigation by the SEC, or that new environmental regulations are being discussed by the EPA can provide potentially profitable trading opportunities in securities of the corporations that may be affected by such events. This information can be particularly important because, while it is public and legal to trade on, it is not always publicly disseminated and, therefore, is not always available to the rest of the marketplace. Analogous to the current debate about high-frequency traders achieving faster access to security pricing data, one might wonder how certain institutional investors obtain public information faster than other investors, and the advantage conferred by this faster access in generating trading profits.

In this paper, we focus on FOIA requests submitted to the Food and Drug Administration (FDA), which is responsible for protecting public health through the supervision of matters including food safety and over-the-counter pharmaceutical drugs. We focus on FDA FOIA requests because we believe that such information is especially likely to be value-relevant to investors. Specifically, pharmaceutical companies invest an enormous amount of human capital and monetary resources in the development of new drugs, and several studies show that FDA decisions have a large impact on stock prices. For example, using an event-study methodology, Bosh and Lee (1994) and Sharma and Lacey (2004) show that FDA decisions on new products are not fully anticipated by the market, and are associated with positive or negative abnormal returns on the day that the FDA announces the approval or rejection of a drug.

There are several significant information events in the life of a new drug, which allow several opportunities to study the impact of FDA FOIA requests on security prices. Even after a drug has been approved, many of its side effects are not known until it is released to the consumer market. At this stage of drug development, the FDA conducts a so-called \post-market surveillance” which entails initiating investigations, issuing warning letters, and even recalling drugs from the market. Jarrell and Peltzman (1985) show that these recalls have a disproportionately large impact on the stock price of the pharmaceutical company, compared to the direct costs associated with the recall. Dowdell, Govindaraj, and Jain (1992) focus on the Tylenol incident, and show that a single FDA packaging regulation resulted in a total of $11 billion in capitalization losses across the Pharma companies affected, much more than the direct costs associated with the newly introduced regulation.

Our study of FOIA information requests is motivated by an important differentiator in this type of information release. That is, information obtained through FOIA requests is publicly available, but is not publicly disseminated, because it is disclosed only to persons submitting a speccific FOIA request. While the media could potentially disseminate this information through repeated FOIA requests, it doesn’t systematically cover everything that could be relevant to sophisticated investors. Thus, our study of FOIA-requested information explores a heretofore ignored gap between information that is released to federal agencies, and, thus, is presumably public, and information that is directly released to – or pursued by – the media.

Top FOIA Requesters FOIA requests

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