Competition and R&D Financing: Evidence from the Biopharmaceutical Industry

Journal of Financial and Quantitative Analysis, Forthcoming

85 Pages Posted: 29 Jan 2021

See all articles by Richard T. Thakor

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Date Written: December 23, 2020

Abstract

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

Suggested Citation

Thakor, Richard T. and Lo, Andrew W., Competition and R&D Financing: Evidence from the Biopharmaceutical Industry (December 23, 2020). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3754494 or http://dx.doi.org/10.2139/ssrn.3754494

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
394
rank
329,175
PlumX Metrics