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

Joseph Golec, Shantaram Hegde and John A. Vernon

No 11229, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G31 I1 L65 O32 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-hea and nep-ino
Note: EH PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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