Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending
AbstractPolitical pressure in the United States is again building to constrain pharmaceutical prices either directly or through legalized reimportation of lower-priced pharmaceuticals from foreign countries. This study uses the Clinton Administration's Health Security Act (HSA) of 1993 as a natural experiment to show how threats of price constraints affect firm-level R&D spending. We link events surrounding the HSA to pharmaceutical company stock price changes and then examine the cross-sectional relation between the stock price changes and subsequent unexpected R&D spending changes. Results show that the HSA had significant negative effects on firm stock prices and R&D spending. Conservatively, the HSA reduced R&D spending by $1.6 billion, even though it never became law. If the HSA had passed, and had many small firms not raised capital just prior to the HSA, the R&D effects could have been much larger.
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Date of creation: Mar 2005
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Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
- I1 - Health, Education, and Welfare - - Health
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-03 (All new papers)
- NEP-FIN-2005-04-03 (Finance)
- NEP-FMK-2005-04-03 (Financial Markets)
- NEP-HEA-2005-04-03 (Health Economics)
- NEP-INO-2005-04-03 (Innovation)
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