Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances

44 Pages Posted: 5 Jul 2000 Last revised: 29 Nov 2022

See all articles by Alexander Tsai

Alexander Tsai

Case Western Reserve University - School of Medicine

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Private Capital Research Institute

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Date Written: January 2000

Abstract

While the variability of public equity financing has been long recognized, its impact on firms has attracted little empirical scrutiny. This paper examines one setting where theory suggests that variations in financing conditions should matter, alliances between small R&D firms and major corporations: Aghion and Tirole [1994] suggest that when financial markets are weak, assigning the control rights to the small firm may be sometimes desirable but not feasible. The performance of 200 agreements entered into by biotechnology firms between 1980 and 1995 suggests that financing availability does matter. Consistent with theory, agreements signed during periods with little external equity financing that assign the bulk of the control to the corporate partner are significantly less successful than other alliances. These agreements are also disproportionately likely to be renegotiated if financial market conditions improve.

Suggested Citation

Tsai, Alexander and Lerner, Josh, Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances (January 2000). NBER Working Paper No. w7464, Available at SSRN: https://ssrn.com/abstract=227597

Alexander Tsai

Case Western Reserve University - School of Medicine ( email )

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Josh Lerner (Contact Author)

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