Competition and R&D Financing Decisions: Theory and Evidence from the Biopharmaceutical Industry

Richard Thakor and Andrew Lo ()

No 20903, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How does competition affect innovation and how it is financed in R&D-intensive firms? We study the interaction between competition, R&D investments, and the financing choices of such firms using data on biopharmaceutical firms. To motivate the empirical hypotheses, we develop a model for such firms in which their capital structure and amounts invested in R&D as well as existing assets are all determined in response to the degree of competition in the industry. The key predictions are that, as competition increases, such firms will: (1) increase R&D investment relative to investment in assets-in-place that support existing products; (2) carry more cash and maintain less net debt; and (3) experience declining betas but greater total stock return volatility due to higher idiosyncratic risk. While the focus is on the biopharmaceutical industry, the results are broadly applicable to other R&Dintensive industries as well. We provide empirical support for these predictions. In order to deal with the endogeneity issue introduced by the fact that a firm's R&D investments and the product-market competition it faces influence each other, we provide further evidence through a differences-in-differences analysis.

JEL-codes: D82 D83 G31 G32 L11 L15 L25 L65 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-com, nep-cse, nep-ind, nep-ino and nep-sbm
Note: CF EH IO PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.nber.org/papers/w20903.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:20903

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20903

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().