Why and How the Value of Science-Based Firms Violates Financial Theory: Implications for Policy and Governance

This paper considers how and why the positive net effect of science-related activities substantially increases the value beyond what would be anticipated by the financial theory, which seems to work so well for other fields. A qualitative analysis of 25 small biotechnology R&D firms listed on a stock exchange illustrates that these firms do not follow the neo-classical expectation of Gaussian returns. To better understand this deviation from the expected Gaussian returns, the firms are compared to S&P 100 and the Thomson Reuters Global Innovator List. It is found that while these large firms have a higher than expected frequency of non-Gaussian events, the causes appear to be dominated by macro-economic or industrial events that impact a large number of firms. With the small R&D-intensive biotechnology firms, it is possible to identify specific events that appear to trigger a sudden increase or decrease in value. A better understanding of the nature and magnitude of these events allows policy makers, investors and managers to better comprehend the unusually large risks and new opportunities associated with biotechnology R&D. From this, a greater insight is afforded into the dynamic value of R&D in general.