The Real Effects of Secondary Markets on Innovation

Abstract

I examine the direct effects of secondary markets on firm investment and innovation. I find that market downturns cause pharmaceutical companies to abandon early-stage drug developments irrespective of drug quality or future investment value. I show that financing constraints appear to drive this behavior. My results indicate that secondary markets have important feedback effects, distinct from information feedback channels, that permanently reduce innovation.

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

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