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The Real Effects of Equity Markets on Innovation

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  • Mace, Chris

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.

Suggested Citation

  • Mace, Chris, 2023. "The Real Effects of Equity Markets on Innovation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(6), pages 2522-2552, September.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:6:p:2522-2552_8
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