Competition and R&D Financing: Evidence from the Biopharmaceutical Industry
Journal of Financial and Quantitative Analysis, Forthcoming
85 Pages Posted: 29 Jan 2021
Date Written: December 23, 2020
The interaction between product market competition, R&D investment, and the financing choices of R&D-intensive firms on the development of innovative products is only partially understood. To motivate empirical hypotheses about this interaction, we develop a model which predicts that as competition increases, R&D-intensive firms will: (1) increase R&D investment relative to assets in place that support existing products; (2) carry more cash; and (3) maintain less net debt. Using the Hatch-Waxman Act as an exogenous shock to competition, we provide causal evidence which supports these hypotheses through a differences-in-differences analysis that exploits differences between the biopharma industry and other industries, and heterogeneity within the biopharma industry. We also explore how these changes affect innovative output, and provide novel evidence that increased competition causes companies to increasingly “focus” their efforts, i.e., there is a decline in the total number of innovations, but an increase in their economic value.
Keywords: Healthcare Finance, Pharmaceutical Industry, Biotechnology Industry, Capital Structure, R&D Investments, Cash Holdings, Competition, Innovation
JEL Classification: G31, G32, L11, L12, L25, L65, O32
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