IDEAS home Printed from https://ideas.repec.org/a/eee/respol/v55y2026i7s0048733326001010.html

Optimal financing design for drug development firms

Author

Listed:
  • Thakor, Richard T.
  • Lo, Andrew W.

Abstract

We examine optimal financing design for R&D-intensive firms developing new drugs. When firms raise external financing using equity, they underinvest in R&D. But when the set of contracts is augmented to include more general (non-linear) payoff schemes, options combined with equity financing, this underinvestment is reduced. We then use a mechanism design approach and show that such non-linear schemes can attenuate R&D underinvestment by using a novel financing design that combines equity with put options to provide bilateral insurance to firms and investors. Investors insure firms against R&D failure and firms insure investors against high R&D payoffs not being realized. Interviews with industry experts indicate both the attractiveness and feasibility of the new financing design.

Suggested Citation

  • Thakor, Richard T. & Lo, Andrew W., 2026. "Optimal financing design for drug development firms," Research Policy, Elsevier, vol. 55(7).
    • Handle: RePEc:eee:respol:v:55:y:2026:i:7:s0048733326001010
    DOI: 10.1016/j.respol.2026.105510
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0048733326001010
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.respol.2026.105510?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:respol:v:55:y:2026:i:7:s0048733326001010. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/respol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.