The Real Effects of Secondary Markets on Innovation
44 Pages Posted: 14 Mar 2019 Last revised: 6 Dec 2019
Date Written: July 1, 2019
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
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