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Pharmaceutical R&D Spending and Threats of Price Regulation

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  • Golec, Joseph
  • Hegde, Shantaram
  • Vernon, John A.

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.

Suggested Citation

  • Golec, Joseph & Hegde, Shantaram & Vernon, John A., 2010. "Pharmaceutical R&D Spending and Threats of Price Regulation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(1), pages 239-264, February.
    • Handle: RePEc:cup:jfinqa:v:45:y:2010:i:01:p:239-264_99
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    Cited by:

    1. Agarwal, Ruchir & Gaule, Patrick, 2022. "What drives innovation? Lessons from COVID-19 R&D," Journal of Health Economics, Elsevier, vol. 82(C).
    2. Lee Branstetter & Chirantan Chatterjee & Matthew J. Higgins, 2014. "Generic Competition and the Incentives for Early-Stage Pharmaceutical Innovation," NBER Working Papers 20532, National Bureau of Economic Research, Inc.
    3. Branstetter, Lee & Chatterjee, Chirantan & Higgins, Matthew J., 2022. "Generic competition and the incentives for early-stage pharmaceutical innovation," Research Policy, Elsevier, vol. 51(10).
    4. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
    5. Ralph S. J. Koijen & Tomas J. Philipson & Harald Uhlig, 2016. "Financial Health Economics," Econometrica, Econometric Society, vol. 84, pages 195-242, January.
    6. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, vol. 50(C), pages 298-311.
    7. Joseph Golec & John Vernon, 2010. "Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms," PharmacoEconomics, Springer, vol. 28(8), pages 615-628, August.
    8. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2017. "The Dynamics of Pharmaceutical Regulation and R&D Investments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 121-141, February.
    9. Joseph P Cook, 2014. "Real Option Value and Path Dependence in Oncology Innovation," Seminar Briefing 000077, Office of Health Economics.
    10. Chan, Konan & Lin, Yueh-Hsiang & Wang, Yanzhi, 2017. "Limits-to-arbitrage, investment frictions, and innovation anomalies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 1-14.
    11. O'Connell, Vincent & Lee, Jong-Ho & O'Sullivan, Don, 2018. "The influence of CEO equity incentives on licensing," European Management Journal, Elsevier, vol. 36(2), pages 266-277.
    12. Lioui, Abraham & Sharma, Zenu, 2012. "Environmental corporate social responsibility and financial performance: Disentangling direct and indirect effects," Ecological Economics, Elsevier, vol. 78(C), pages 100-111.

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