Fda Safety Alerts and Firm Lobbying: the Friday Effect and Its Consequences
Total Page：16
File Type：pdf, Size：1020Kb
FDA SAFETY ALERTS AND FIRM LOBBYING: THE FRIDAY EFFECT AND ITS CONSEQUENCES Luis Diestre IE Business School Alvarez de Baena, 4 Madrid, 28006, Spain Tel: +34 (91) 5689600 Fax: +34 (91) 5689747 e-mail: [email protected] Benjamin Barber IV IE Business School Alvarez de Baena, 4 Madrid, 28006, Spain Tel: +34 (91) 5689600 Fax: +34 (91) 5689747 e-mail: [email protected] Juan Santaló IE Business School Alvarez de Baena, 4 Madrid, 28006, Spain Tel: +34 (91) 5689600 Fax: +34 (91) 5689747 e-mail: [email protected] Work in progress, please do not cite or circulate without permission 1 We integrate the corporate political activity literature with impression management research to explore whether lobbying allows firms to influence the timing of negative news by the FDA. First, we show that FDA safety alerts announced on Fridays experience a lower diffusion by healthcare experts and the media. Furthermore, we find that firms who lobby the FDA are more likely to have safety alerts for their drugs announced on Fridays. We find this effect to be stronger for severe safety alerts. Finally, we explore the public health implications of the lower diffusion of Friday safety alerts and find that, although safety alerts are in general effective in reducing patients’ adverse effects, this effectiveness is substantially lower for alerts announced on Fridays. Specifically, compared to non-Friday alerts, Friday safety alerts are associated with 30% more deaths, 28% more serious adverse events (death, hospitalization, disability, life-threatening, and/or congenital anomaly) and 26% more adverse events in general. 2 Firms are dependent on governments and public institutions for their success (Bonardi, Hillman, and Keim, 2005; De Figueiredo and Richter, 2014; Hillman, Keim, and Schuler, 2004). Public officials determine firms’ fates by restricting market entry (e.g., issuing licenses), determining the competitive environment (e.g., regulating prices and issuing patents), or administering sanctions (e.g., issuing fines for regulatory non-compliance). Given this strong dependence on the public sphere, it is not surprising firms undertake political activities to cope with the inherent policy uncertainty. Firm’s political activities have been shown to influence decisions about taxes (Richter, Samphantharak, and Timmons, 2009), federal contracts (Ridge, Ingram, and Hill, 2017), and regulated prices (Bonardi, Holburn, and Bergh, 2006). Overall, the corporate political activities (CPA) literature has provided rich evidence that political efforts can shape public officials’ decisions in the firm’s favor. Yet, government officials not only make policy decisions but, in the majority of the cases, they also communicate these decisions to the public. This communication is critically important since the way officials communicate news can affect the firm as much as the content of the decisions themselves. Prior impression management studies show how the manner in which corporate news are communicated to external audiences—e.g., when is the information made public, or through which channel—strongly determines external audiences’ interpretation and reaction to that new information (Elsback, Sutton, and Principe 1998; Graffin, Haleblian, and Kiley, 2016). When it comes to policy decisions this is especially true. Because there is a lot of uncertainty about how a new policy will affect a specific company, the way in which a firm’s stakeholders will interpret and react to a policy decision depends on how such decision is communicated. Ideally, then, firms would want policy decisions be communicated to the public in the way that triggers the most positive (or least negative) reactions. This is exactly what firms 3 do when it comes to communicating internal corporate news: the impression management literature has provided broad evidence that firms are very strategic when designing their communication activities in an attempt to manage audiences’ perceptions (Bolino, Kacmar, Turnley, and Gilstrap, 2008; Elsbach, 2006, 2012; Graffin et al., 2016). Yet, when it comes to policy decisions, it is public officials, not firms, who communicate news to the public. The question is then: can firms “persuade” public officials to implement impression management tactics similar to the ones firms implement when they communicate internal corporate news? Are political activities helpful not only at shaping policy-making, but also at shaping policy- communication? To our knowledge, this is an unexplored question in the CPA literature. We aim to fill this gap by looking at a specific type of policy communication: the reporting of drug safety news by the U.S. Food and Drug Administration (FDA). The FDA is responsible for identifying and reporting potential safety issues on marketed pharmaceutical drugs. When the agency discovers that a marketed drug has a previously unknown side-effect that represents a risk for patients’ health, it releases a safety alert communication where it explains the severity and scope of the drug’s safety issues, and the suggested changes in doctors’ prescription behavior. Obviously, these alerts have negative consequences for the firm selling the drug (Chen, Ganesan, and Liu, 2009). First, the announcement that the firm missed an important side-effect during the development of the drug is likely to trigger a negative reputation, which may lead to greater scrutiny in the future (Ahmed, Gardella, and Nanda, 2002; Dowdell, Govindaraj, and Jain, 1992; Cheah, Chang, and Chieng, 2007). In addition, drug sales are likely to drop due to changes in doctors’ prescription behavior and patients’ reactions to safety scandals (Dusetzina et al., 2012; Hurren, Taylor and Jaber, 2011). 4 In this study, we claim that the magnitude of these negative consequences will depend upon the way the FDA releases the news. Prior research in impression management has identified several factors that are likely to affect how strongly external audiences react to negative corporate news (Bolino et al., 2008; Elsbach, 2006, 2012). In this study we focus on one particular factor: the timing of the communication. How stakeholders react to safety news depends upon how quickly, and broadly, such news diffuses. Key information intermediaries, i.e. the media and industry experts, typically are the ones to provide this type of technical news to the public, however these intermediaries’ attention is not constant over time (Deephouse and Heugens, 2009; Hoffman and Ocasio, 2001). A large literature on organizational behavior and labor economics has shown how cognitive attention varies significantly over the workweek. Specifically, on Fridays productivity and motivation are at the lowest (Accountemps, 2013; Sotak et al., 2015), absenteeism is at the highest (Herrman and Rockoff, 2012; Johns and Hajj, 2016; Miller Murnane, and Willet, 2008), and professionals work the least amount of hours (Beckers et al., 2008; Harrison and Hulin, 1989; Nader et al., 2012). This means professionals are less likely to pay attention, assess, and react to events happening on Fridays. We build on this logic to propose that healthcare professionals and media will be less attentive to FDA safety alerts that take place on Fridays. Accordingly, we expect Friday alerts to experience a slower and narrower diffusion. This means that the negative consequences associated with safety alerts— negative reputation and drop in sales—should be less negative for Friday alerts. Based on this, we expect firms will prefer their safety alerts reported on Fridays. We build on the CPA literature to examine whether firms’ corporate political activities, specifically lobbying activities, allow them to influence when the FDA communicates safety alerts. We argue that lobbying establishes a communication channel with the FDA, increasing firms’ ability to 5 influence public officials’ decisions about when to release safety news. Given that firms are likely to prefer low diffusion of safety news, we predict that corporate lobbying should increase the probability that a firm’s alert is announced on a Friday. We then build on the assumption that firms have limited political capital. With limited political capital firms cannot exploit their relationship with public officials without some cost. Under this assumption, we expect firms to be selective and use their political influence when it is most valuable. In our context, we expect that firms will be more likely to use their influence on the FDA for severe safety alerts—i.e., those that have a dramatic impact on patients’ health. These alerts are more likely to trigger a stronger reputational loss and a larger drop in drug sales (Cheah et al., 2007). Therefore, we expect that the positive effect of lobbying on the probability that an alert is issued on a Friday will be greater for severe safety alerts. We test our predictions in a sample of 441 safety alerts reported by FDA between 1999 and 2016. First, we find that alerts reported on Fridays receive weaker diffusion by healthcare experts and mass media. To capture diffusion by healthcare experts we look at whether such experts shared safety alert news within their professional network (retweets of safety alert news in their twitter accounts), whereas to capture diffusion by mass media we look into the number of articles in U.S. newspapers covering a specific safety alert. We find that Friday alerts have far less retweets and news articles than alerts announced any other weekday. Furthermore, we find that firm lobbying increases the chances of having