The Real Effects of Equity Markets on Innovation

31 Pages Posted: 14 Mar 2019 Last revised: 22 Dec 2023

See all articles by Chris Mace

Chris Mace

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: October 6, 2022

Abstract

In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this article, I show that equity markets can also inhibit innovation. In public firms, I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments, irrespective of drug quality or changes in a firm’s stock price. I show that financing constraints drive this behavior, highlighting that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.

Keywords: Investment, Innovation, Market Downturns, Secondary Markets, Pharmaceutical Industry

JEL Classification: C26, D53, E44, G01, G14, G32, O16, O32

Suggested Citation

Mace, Chris, The Real Effects of Equity Markets on Innovation (October 6, 2022). Available at SSRN: https://ssrn.com/abstract=3348102 or http://dx.doi.org/10.2139/ssrn.3348102

Chris Mace (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States
972-883-5180 (Phone)

HOME PAGE: http://jindal.utdallas.edu/faculty/christopher-mace/

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