Download this Paper Open PDF in Browser

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

46 Pages Posted: 25 Jan 2015 Last revised: 7 Nov 2017

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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 6, 2017

Abstract

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

Suggested Citation

Thakor, Richard T. and Lo, Andrew W., Competition and R&D Financing: Evidence from the Biopharmaceutical Industry (November 6, 2017). 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 )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Stata Center
Cambridge, MA 02142
United States

Paper statistics

Downloads
291
rank
84,959
Abstract Views
1,352