52 Pages Posted: 25 Jan 2015 Last revised: 7 Nov 2016
Date Written: November 4, 2016
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: 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