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Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances

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  • Josh Lerner
  • Alexander Tsai

Abstract

While the variability of public equity financing has been long recognized, its impact on firms has attracted little empirical scrutiny. This paper examines one setting where theory suggests that variations in financing conditions should matter, alliances between small R&D firms and major corporations: Aghion and Tirole [1994] suggest that when financial markets are weak, assigning the control rights to the small firm may be sometimes desirable but not feasible. The performance of 200 agreements entered into by biotechnology firms between 1980 and 1995 suggests that financing availability does matter. Consistent with theory, agreements signed during periods with little external equity financing that assign the bulk of the control to the corporate partner are significantly less successful than other alliances. These agreements are also disproportionately likely to be renegotiated if financial market conditions improve.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7464.

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Date of creation: Jan 2000
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Publication status: published as Journal of Financial Economics, 67 (March 2003) 411-446.
Handle: RePEc:nbr:nberwo:7464

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