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Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality

  • Sean Nicholson

    (The Wharton School, University of Pennsylvania)

We examine the determinants of biotech-pharmaceutical alliance prices to determine whether the market for alliances is characterized by asymmetric information. We find that inexperienced biotech companies receive substantially discounted payments when forming their first alliance. A jointly developed drug is more likely to advance in clinical trials than a drug developed by a single company, so the first-deal discount is not consistent with the drug's subsequent performance. Biotech companies receive substantially higher valuations from venture capitalists and the public equity market after forming their first alliance, which implies that alliances send a positive signal to prospective investors.

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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 4 (July)
Pages: 1433-1464

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1433-1464
Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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  2. Chan, Yuk-Shee, 1983. " On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, vol. 38(5), pages 1543-68, December.
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  7. Aghion, Philippe & Tirole, Jean, 1994. "The Management of Innovation," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1185-1209, November.
  8. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
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