TY - JOUR AU - Ellison,Sara Fisher AU - Mullin,Wallace P. TI - Gradual Incorporation of Information into Stock Prices: Empirical Strategies JF - National Bureau of Economic Research Working Paper Series VL - No. 6218 PY - 1997 Y2 - October 1997 UR - http://www.nber.org/papers/w6218 L1 - http://www.nber.org/papers/w6218.pdf N1 - Author contact info: Sara Fisher Ellison MIT, E52-274A 50 Memorial Drive Cambridge, MA 02142 Tel: 617-253-3821 Fax: 617-253-1330 E-Mail: sellison@mit.edu Wallace Mullin Department of Economics George Washington University 2115 G Street N.W. Washington, DC 20052 Tel: 202/994-8087 Fax: 202/994-6147 E-Mail: wpmullin@gwu.edu AB - This paper explores environments in which either the revelation or diffusion of information, or its incorporation into stock prices, is gradual, and develops appropriate estimation techniques. This paper has implications both for event study methodology and for understanding the process by which stock prices incorporate information. Two environments are highlighted. First, information is often not revealed 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 health care reform proposal on pharmaceutical stock prices. We estimate the expected path of market-adjusted pharmaceutical prices over September 1992- October 1993 by isotonic regression, and find that the major portion of the decline in stock prices occurred gradually, and did not correspond to identified news events. Second, the trading process itself may incorporate private information into stock prices gradually. That is an implication of the Kyle (1985) model, in which one or a small number of informed traders use their market power over their private information to maximize profits dynamically. We use the functional form predictions from Kyle in our estimation, and the results from a sample of targets of tender offers are consistent with the model. ER -