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

52 Pages Posted: 25 Jan 2015 Last revised: 7 Nov 2016

Richard T. Thakor

University of Minnesota - Carlson School of Management

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Date Written: November 4, 2016

Abstract

How does competition affect innovation and how it is financed in R&D-intensive firms? We study the interaction between competition, R&D investments, and the financing choices of such firms using data on biopharmaceutical firms. Motivated by existing theories, we develop several empirically testable hypotheses. The key predictions are that, as competition increases, R&D-intensive firms will: (1) increase R&D investment relative to investment in assets-in-place that support existing products; (2) carry more cash and maintain less net debt; and (3) experience declining betas but greater total stock return volatility due to higher idiosyncratic risk. We first establish stylized facts using time-series evidence that is consistent with these predictions. To address the endogeneity issue introduced by the fact that a firm's R&D investments and the product-market competition it faces influence each other, we then provide further evidence supporting these predictions through a differences-in-differences analysis.

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

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

Suggested Citation

Thakor, Richard T. and Lo, Andrew W., Competition and R&D Financing Decisions: Evidence from the Biopharmaceutical Industry (November 4, 2016). 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 )

19th Avenue South
Minneapolis, MN 55455
United States

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Cambridge, MA 02142
United States

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