Pharmaceutical R&D Spending and Threats of Price Regulation

Joseph Golec, Shantaram Hegde and John A. Vernon

Journal of Financial and Quantitative Analysis, 2010, vol. 45, issue 1, 239-264

Abstract: Do threats of pharmaceutical price regulation affect subsequent research and development (R&D) spending? This study uses the Clinton administration’s Health Security Act (HSA) of 1993 as a natural experiment to study this issue. We link events surrounding the HSA to pharmaceutical stock price changes and then examine the cross-sectional relation between firms’ stock price changes and their subsequent unexpected R&D spending changes. Results show that the HSA had significant negative effects on stock prices and firm-level R&D spending. Conservatively, the HSA reduced R&D spending by about $1 billion even though it never became law.

Date: 2010
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