Hostname: page-component-745bb68f8f-v2bm5 Total loading time: 0 Render date: 2025-01-20T17:49:22.802Z Has data issue: false hasContentIssue false
  • English
  • Français

The Real Effects of Equity Markets on Innovation

Published online by Cambridge University Press:  06 October 2022

Chris Mace Open the ORCID record for Chris Mace [Opens in a new window]
Chris Mace*
Affiliation:
The University of Texas at Dallas Jindal School of Management
*
[email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this article, I show that equity markets can also inhibit innovation. In public firms, I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments, irrespective of drug quality or changes in a firm’s stock price. I show that financing constraints drive this behavior, highlighting that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2522 - 2552
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Mariassunta Giannetti, Itay Goldstein, Umit Gurun, Jarrad Harford (the editor), Davidson Heath, Gerard Hoberg, Ben Iverson, Jiacui Li, Elena Patel, Matthew Ringgenberg, Nathan Seegert, Richard Thakor (the referee), and the seminar participants at Brigham Young University, the University of Iowa, the University of Texas at Dallas, The University of Utah, Michigan State University, Tulane University, and the 2019 FMA Doctoral Student Consortium for their helpful comments and suggestions.

References

Aghamolla, C., and Thakor, R. T.. “IPO Peer Effects.” Journal of Financial Economics, 144 (2021), 206–226.Google Scholar
Aghion, P.; Askenazy, P.; Berman, N.; Cette, G.; and Eymard, L.. “Credit Constraints and the Cyclicality of R&D Investment: Evidence from France.” Journal of the European Economic Association, 10 (2012), 1001–1024.Google Scholar
Bernstein, S. “Does Going Public Affect Innovation?” Journal of Finance, 70 (2015), 1365–1403.Google Scholar
Bond, P.; Edmans, A.; and Goldstein, I.. “The Real Effects of Financial Markets.” Annual Review of Financial Economics, 4 (2012), 339–360.Google Scholar
Brown, J. R.; Fazzari, S. M.; and Petersen, B. C.. “Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom.” Journal of Finance, 64 (2009), 151–185.Google Scholar
Brown, J. R.; Martinsson, G.; and Petersen, B. C.. “Do Financing Constraints Matter for R&D?” European Economic Review, 56 (2012), 1512–1529.Google Scholar
Budish, E.; Roin, B. N.; and Williams, H.. “Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials.” American Economic Review, 105 (2015), 2044–2085.Google ScholarPubMed
Butler, D. “Translational Research: Crossing the Valley of Death.” Nature News, 453 (2008), 840–842.Google ScholarPubMed
Campello, M.; Giambona, E.; Graham, J. R.; and Harvey, C. R.. “Access to Liquidity and Corporate Investment in Europe During the Financial Crisis.” Review of Finance, 16 (2012), 323–346.Google Scholar
Campello, M.; Graham, J. R.; and Harvey, C. R.. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics, 97 (2010), 470–487.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.Google Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.Google Scholar
Cunningham, C.; Ederer, F.; and Ma, S.. “Killer Acquisitions.” Available at SSRN 3241707 (2018).Google Scholar
Daniel, M. G.; Pawlik, T. M.; Fader, A. N.; Esnaola, N. F.; and Makary, M. A.. “The Orphan Drug Act.” American Journal of Clinical Oncology, 39 (2016), 210–213.Google ScholarPubMed
Davis, J. L.; Fama, E. F.; and French, K. R.. “Characteristics, Covariances, and Average Returns: 1929 to 1997.” Journal of Finance, 55 (2000), 389–406.Google Scholar
DiMasi, J. A.; Grabowski, H. G.; and Hansen, R. W.. “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs.” Journal of Health Economics, 47 (2016), 20–33.Google Scholar
Edmans, A.; Fang, V. W.; and Zur, E.. “The Effect of Liquidity on Governance.” Review of Financial Studies, 26 (2013), 1443–1482.Google Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The impact of prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.Google Scholar
Fang, V. W.; Noe, T. H.; and Tice, S.. “Stock Market Liquidity and Firm Value.” Journal of Financial Economics, 94 (2009), 150–169.Google Scholar
Gagne, J. J., and Choudhry, N. K.. “How Many “Me-Too” Drugs is Too Many?” JAMA, 305 (2011), 711–712.Google ScholarPubMed
Giffin, R.; Robinson, S.; Wizemann, T.. Breakthrough Business Models: Drug Development for Rare and Neglected Diseases and Individualized Therapies. Washington, DC: National Academies Press (2009).Google Scholar
Hadlock, C., and Pierce, J.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hall, B. H., and Lerner, J.. “The Financing of R&D and Innovation.” In Handbook of the Economics of Innovation, Vol. 1, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam, Netherlands: Elsevier (2010), 609–639.Google Scholar
Hay, M.; Thomas, D. W.; Craighead, J. L.; Economides, C.; and Rosenthal, J.. “Clinical Development Success Rates for Investigational Drugs.” Nature Biotechnology, 32 (2014), 40.Google ScholarPubMed
Jørring, A.; Lo, A. W.; Philipson, T. J.; Singh, M.; and Thakor, R. T.. “Sharing R&D Risk in Healthcare via FDA Hedges.” Review of Corporate Finance Studies, 44 (2021), Cfab024.Google Scholar
Kang, M. J., and Kim, Y. H.. “Stock Market Liquidity and Short-Termism Driven CEO Turnover.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1876331 (2015).Google Scholar
Kaplan, S., and Zingales, L.. “Do Financial Constraints Explain Why Investment Is Correlated with Cash Flow?” Quarterly Journal of Economics, 112 (1997), 169–216.Google Scholar
Kerr, W. R., and Nanda, R.. “Financing Innovation.” Annual Review of Financial Economics, 7 (2015), 445–462.Google Scholar
Krieger, J. L. “Trials and Terminations: Learning from Competitors’ R&D Failures.” Management Science, 67 (2021), 5301–5967.Google Scholar
Krieger, J. L.; Li, D.; and Papanikolaou, D.. “Developing Novel Drugs.” Technical Report, National Bureau of Economic Research (2018).Google Scholar
Krieger, J.; Li, X.; and Thakor, R.. “Find and Replace: R&D Investment Following the Erosion of Existing Products.” Working Paper, available at https://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2021.4243 (2018).Google Scholar
Lerner, J.; Shane, H.; and Tsai, A.. “Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances.” Journal of Financial Economics, 67 (2003), 411–446.Google Scholar
Li, D. “Financial Constraints, R&D Investment, and Stock Returns.” Review of Financial Studies, 24 (2011), 2974–3007.Google Scholar
Lo, A. W. “Bridging the Valley of Death Through Financial Innovation: Written Testimony of Andrew W. Lo Prepared for the US House of Representatives Financial Services Committee.” Sept. 12 (2019).Google Scholar
Lo, A. W., and Thakor, R. T.. “Financing Medical Innovation” (2021).Google Scholar
Loughnot, D. “Potential Interactions of the Orphan Drug Act and Pharmacogenomics: A Flood of Orphan Drugs and Abuses?” American Journal of Law & Medicine, 31 (2005), 365–380.Google Scholar
Milbourn, T. T. “CEO Reputation and Stock-Based Compensation.” Journal of Financial Economics, 68 (2003), 233–262.Google Scholar
Myers and Howe. “A Life Cycle Model of Pharmaceutical R&D.” Technical Report, Massachusetts Institute of Technology (1997).Google Scholar
Regnier, S. “What is the Value of “Me-Too” Drugs?” Health Care Management Science, 16 (2013), 300–313.Google ScholarPubMed
Rzakhanov, Z. “Multistage Investment, Systematic Risk Premium and CAPM Beta: Empirical Evidence from Product Development.” Applied Financial Economics, 22 (2012), 777–790.Google Scholar
Sheen, A. “Do Public and Private Firms Behave Differently? An Examination of Investment in the Chemical Industry.” Journal of Financial and Quantitative Analysis, 55 (2020), 2530–2554.Google Scholar
Sibbald, B. “Drug Regulation: Rofecoxib (Vioxx) Voluntarily Withdrawn from Market.” Canadian Medical Association Journal, 171 (2004), 1027.Google ScholarPubMed
Stafford, R. S. “Regulating Off-Label Drug Use: Rethinking the Role of the FDA.” New England Journal of Medicine, 358 (2008), 1427–1429.Google ScholarPubMed
Thakor, R. T.; Anaya, N.; Zhang, Y.; Vilanilam, C.; Siah, K. W.; Wong, C. H.; and Lo, A. W.. “Just How Good an Investment is the Biopharmaceutical Sector?” Nature Biotechnology, 35 (2017), 1149–1157.Google Scholar
Whited, T., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar
Supplementary material: PDF

Mace supplementary material

Mace supplementary material

Download Mace supplementary material(PDF)
PDF 482.4 KB