The Real Effects of Secondary Markets on Innovation

54 Pages Posted: 14 Mar 2019 Last revised: 27 Oct 2020

See all articles by Chris Mace

Chris Mace

UT Dallas, Naveen Jindal School of Management

Date Written: October 26, 2020


In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this paper, I show that secondary markets can inhibit innovation by permanently delaying option exercise and reducing a firm's ability to allocate capital efficiently. I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments irrespective of drug quality or changes in a firm's stock price. I show that discount rate changes and financing constraints drive this behavior. My results demonstrate that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.

Keywords: Investment, Innovation, Market Downturns, Secondary Markets, Pharmaceutical Industry

JEL Classification: C26, D53, E44, G01, G14, G32, O16, O32

Suggested Citation

Mace, Chris, The Real Effects of Secondary Markets on Innovation (October 26, 2020). Available at SSRN: or

Chris Mace (Contact Author)

UT Dallas, Naveen Jindal School of Management ( email )

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ATTN: Christopher Mace JSOM 14.506
Richardson, TX 84112-9303
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