Competition and R&D Financing: Evidence From the Biopharmaceutical Industry

Richard Thakor and Andrew W. Lo

Journal of Financial and Quantitative Analysis, 2022, vol. 57, issue 5, 1885-1928

Abstract: The interaction between product market competition, R&D investment, and the financing choices of R&D-intensive firms on the development of innovative products is only partially understood. We hypothesize that as competition increases, R&D-intensive firms will: i) increase R&D investment relative to existing assets in place; ii) carry more cash; and iii) maintain less net debt. Using the Hatch–Waxman Act as an exogenous shock to competition, we provide causal evidence supporting these hypotheses through a differences-in-differences analysis that exploits differences between the biopharma industry and other industries, and heterogeneity within the biopharma industry. We also explore how these changes affect innovative output.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:57:y:2022:i:5:p:1885-1928_8

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