Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending

54 Pages Posted: 20 Nov 2006 Last revised: 8 Sep 2010

See all articles by Joseph H. Golec

Joseph H. Golec

University of Connecticut - Department of Finance

Shantaram P. Hegde

University of Connecticut- Finance Department

John A. Vernon

University of North Carolina (UNC) at Chapel Hill; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

Political pressure in the United States is again building to constrain pharmaceutical prices either directly or through legalized reimportation of lower-priced pharmaceuticals from foreign countries. This study uses the Clinton Administration's Health Security Act (HSA) of 1993 as a natural experiment to show how threats of price constraints affect firm-level R&D spending. We link events surrounding the HSA to pharmaceutical company stock price changes and then examine the cross-sectional relation between the stock price changes and subsequent unexpected R&D spending changes. Results show that the HSA had significant negative effects on firm stock prices and R&D spending. Conservatively, the HSA reduced R&D spending by $1.6 billion, even though it never became law. If the HSA had passed, and had many small firms not raised capital just prior to the HSA, the R&D effects could have been much larger.

Suggested Citation

Golec, Joseph and Hegde, Shantaram P. and Vernon, John A., Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending (March 2005). NBER Working Paper No. w11229, Available at SSRN: https://ssrn.com/abstract=693090

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Shantaram P. Hegde

University of Connecticut- Finance Department ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

John A. Vernon (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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