The Real Effects of Equity Markets on Innovation

Chris Mace

Journal of Financial and Quantitative Analysis, 2023, vol. 58, issue 6, 2522-2552

Abstract: 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.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:58:y:2023:i:6:p:2522-2552_8

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