Interfirm Collaboration, Ownership Stakes and Hold-Up Costs: Evidence from the Pharmaceutical Industry

45 Pages Posted: 14 Dec 2021 Last revised: 1 Feb 2022

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: January 27, 2022

Abstract

Theory shows that ownership stakes between firms can mitigate hold-up costs that would
otherwise impede interfirm collaboration. We construct a model of the pharmaceutical industry
that predicts hold-up costs are an inverted U-shaped function of the collaborative drug’s likelihood
of approval. Using a sample of collaborations between pharmaceutical firms on specific drugs and
detailed drug and firm-level data, we find strong support for the model’s predictions: ownership
stakes are a hump-shaped function of the likelihood of drug approval. We conclude that ownership
stakes extend the boundaries of the firm by enhancing its ability to collaborate with other firms.

Keywords: Equity stakes; hold-up costs; license agreements; pharmaceutical and biotechnology industry; firm boundaries; likelihood of approval

JEL Classification: D22, G32, G34, I15, L14, L16, O32

Suggested Citation

Billett, Matthew T. and Floros, Ioannis V. and Tian, Xuan, Interfirm Collaboration, Ownership Stakes and Hold-Up Costs: Evidence from the Pharmaceutical Industry (January 27, 2022). Available at SSRN: https://ssrn.com/abstract=3978150 or http://dx.doi.org/10.2139/ssrn.3978150

Matthew T. Billett (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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