The Real Effects of Equity Markets on Innovation
31 Pages Posted: 14 Mar 2019 Last revised: 22 Dec 2023
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
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