R&D strategy and stock price volatility in the biotechnology industry
AbstractPurpose – Biotech share price is highly volatile, compared to most other industries. There is limited explanation for what causes such a high volatility. The purpose of this study is to explore how R&D strategies selected by biotech firms affect their share price volatilities. Specifically, the paper empirically investigates the impact of drug discovery and development diversification on share price volatility. Design/methodology/approach – Regression analysis is applied to observe the effect of R&D strategy on share price volatility. Share price volatility is regressed on the measure of drug discovery and development diversification. Strategies are classified into two categories: diversified vs. concentrated. Meanwhile, other factors that have an influence on share price volatility such as firm maturity, firm size, and book-to-market ratio are controlled. For robustness, a return model is also used to further test the effect of R&D strategy, and sensitivity analyses using alternative drug discovery and development diversification measures are performed. Empirical data was collected for publicly-traded biotech firms from COMPUSTAT, CRSP and Biospace. Findings – The major finding of this study is the significant impact of R&D strategy in term of drug discovery and development diversification on share price volatility. Firms that have more diversified drug portfolios are associated with lower share price volatilities; and lower stock returns. In contrast, firms that have more concentrated drug portfolios are associated with higher share price volatilities; and higher stock returns. Research limitations/implications – Future research can explore effects of other aspects of the drug discovery and development as well as other firm attributes on biotech share price volatility. In addition, share price volatility may have impacts on managerial issues such as employee stock option issuance. Such impacts should also be studied. Originality/value – This study targets a major aspect (i.e. R&D strategy) of the very fundamental value drive in the industry (i.e. drug discovery and development) to shed light on the limited understanding of what contribute to biotech share price volatility. The benefit of produce diversification has been examined in some other industries; however, its benefit is largely unknown in the biotech industry. This study has implications for investor risk assessment and corporate risk management.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Review of Accounting and Finance.
Volume (Year): 5 (2006)
Issue (Month): 1 (February)
Contact details of provider:
Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.