Competition and R&D Financing: Evidence from the Biopharmaceutical Industry
46 Pages Posted: 25 Jan 2015 Last revised: 7 Nov 2017
Date Written: November 6, 2017
How does competition affect innovation investment 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 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 (3) maintain less net debt. We provide evidence supporting these predictions 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.
Keywords: Healthcare Finance; Pharmaceutical Industry; Biotechnology Industry; Capital Structure; R&D Investments; Competition
JEL Classification: G31, G32, L11, L12, L25, L65, O32
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