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Corporate misconduct and innovation: Evidence from the pharmaceutical industry

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  • Unsal, Omer
  • Hippler, William J.

Abstract

We examine the relationship between corporate misconduct and pharmaceutical firm innovation and performance. Pharmaceutical firms obtain significantly fewer new product approvals by the U.S. Food and Drug Administration (FDA) following corporate regulatory violations, lawsuits, and Securities and Exchange Commission (SEC) regulatory enforcement actions. We also examine the potential reasons why innovative capacity is reduced for culpable firms. Following instances of misconduct, pharmaceutical firms are 50 percent less likely to engage in business expansions, engage in significantly fewer new strategic alliances and partnerships, and are awarded fewer government R&D grants. We attribute these results to the reputational loss associated with public knowledge of corporate misconduct. In support of this hypothesis, we find pharmaceutical firms experience negative cumulative abnormal stock returns (CARs) surrounding SEC enforcement announcements, and misconduct incidents increase the probability of analyst concerns. Overall, our results are consistent with the reputational loss associated with corporate misconduct being an important factor in future reductions in pharmaceutical firm innovative capacity.

Suggested Citation

  • Unsal, Omer & Hippler, William J., 2024. "Corporate misconduct and innovation: Evidence from the pharmaceutical industry," Research in International Business and Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:riibaf:v:71:y:2024:i:c:s0275531924002836
    DOI: 10.1016/j.ribaf.2024.102490
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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