Competition and R&D Financing: Evidence from the Biopharmaceutical Industry

49 Pages Posted: 25 Jan 2015 Last revised: 12 Feb 2018

See all articles by Richard T. Thakor

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Multiple version iconThere are 2 versions of this paper

Date Written: February 2018

Abstract

What is the interaction between competition, R&D investments, and the financing choices of R&D-intensive firms? Motivated by existing theories, we hypothesize that as competition increases, R&D-intensive firms will: (1) increase R&D investment relative to assets-in-place that support existing products; (2) carry more cash; and (3) maintain less net debt. We provide causal evidence supporting these hypotheses by exploiting differences between the biopharma industry and other industries, as well as heterogeneity within the biopharma industry, in response to an exogenous change in competition. We also explore how these changes affect innovative output, and provide novel evidence that in response to greater competition, companies increasingly “focus” their efforts—there is a relative decline in the total number of innovations, but an increase in the economic value of these innovations.

Keywords: Healthcare Finance; Pharmaceutical Industry; Biotechnology Industry; Capital Structure; R&D Investments; Competition; Innovation

JEL Classification: G31, G32, L11, L12, L25, L65, O32

Suggested Citation

Thakor, Richard T. and Lo, Andrew W., Competition and R&D Financing: Evidence from the Biopharmaceutical Industry (February 2018). MIT Sloan Research Paper No. 5140-15, Available at SSRN: https://ssrn.com/abstract=2554843 or http://dx.doi.org/10.2139/ssrn.2554843

Richard T. Thakor

University of Minnesota - Carlson School of Management ( email )

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Minneapolis, MN 55455
United States

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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Cambridge, MA 02142
United States

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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Santa Fe Institute

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