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R&D Investments, Profitability and Regulation of the Pharmaceutical Industry

37 Pages Posted: 29 Nov 2014 Last revised: 25 Apr 2017

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Jörg Mahlich

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

B. Burcin Yurtoglu

WHU - Otto Beisheim School of Management

Date Written: April 24, 2017

Abstract

Pharmaceutical firms are frequently in the center of political debate due to their high accounting profitability. We show that, under plausible assumptions, abnormal profitability in the U.S. pharmaceutical industry is a kind of optical illusion created by accounting standards for investment in research and development and their influence on reported accounting profit and book equity. We further show that the perception of high profitability of U.S. pharmaceutical firms triggers excessive regulatory scrutiny and increases regulation of the pharmaceutical industry. Regulators seem to fixate on reported profitability and do not adjust for accounting distortions caused by R&D accounting. We discuss the likely consequences of regulation that is largely motivated by distorted profitability.

Keywords: Pharmaceutical firms, ROE, accounting for R&D, regulation

JEL Classification: L65, M41, G18

Suggested Citation

Goncharov, Igor and Mahlich, Jörg and Yurtoglu, B. Burcin, R&D Investments, Profitability and Regulation of the Pharmaceutical Industry (April 24, 2017). Available at SSRN: https://ssrn.com/abstract=2531467 or http://dx.doi.org/10.2139/ssrn.2531467

Igor Goncharov

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Jörg Mahlich

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

B. Burcin Yurtoglu (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Chair of Corporate Finance
Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509-721 (Phone)
+49 261 6509-729 (Fax)

HOME PAGE: http://www.whu.edu/forschung/fakultaet/finance-group/corporate-finance/

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