The Role of Assets in Place: Loss of Market Exclusivity and Investment

47 Pages Posted: 28 Jul 2020

See all articles by Matthew John Higgins

Matthew John Higgins

University of Utah - Department of Entrepreneurship & Strategy; National Bureau of Economic Research (NBER); Max Planck Institute for Innovation and Competition

Mathias Kronlund

Tulane University

Ji Min Park

University of Illinois at Urbana-Champaign - Department of Finance

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: July 2020

Abstract

We utilize a novel identification strategy to analyze the impact of assets in place on firms' decisions for future projects. We exploit the context in the pharmaceutical industry, where the loss of market exclusivity for a branded drug can be used to separate the impact of cash flows generated by a firm's current assets in place from the characteristics of its future investment opportunities. We first show that around the exclusivity losses in our sample of large drugs, the affected firms' profitability drop significantly. The timing of this profitability decrease was predetermined many years ago, and therefore, arguably independent of current investment opportunities. Nevertheless, we find that R&D spending drops by approximately 25% over two years following the loss of exclusivity. We also find that stock repurchases and cash balances decline significantly. Our findings do not support the predictions of traditional capital budgeting, but are more consistent with the pecking order theory. These results further point to a lack of long-term lifecycle management that could mitigate the effect of predictable negative shocks to cash flows.

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Suggested Citation

Higgins, Matthew John and Kronlund, Mathias and Park, Ji Min and Pollet, Joshua Matthew, The Role of Assets in Place: Loss of Market Exclusivity and Investment (July 2020). NBER Working Paper No. w27588, Available at SSRN: https://ssrn.com/abstract=3661080

Matthew John Higgins (Contact Author)

University of Utah - Department of Entrepreneurship & Strategy ( email )

1655 East Campus Center Dr.
Salt Lake City, UT 84112
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

Mathias Kronlund

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ji Min Park

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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