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The Real Effects of Equity Markets on Innovation

Published online by Cambridge University Press:  06 October 2022

Chris Mace Open the ORCID record for Chris Mace [Opens in a new window]
Chris Mace*
Affiliation:
The University of Texas at Dallas Jindal School of Management
*
christopher.mace@utdallas.edu
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Abstract

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In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this article, I show that equity markets can also inhibit innovation. In public firms, I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments, irrespective of drug quality or changes in a firm’s stock price. I show that financing constraints drive this behavior, highlighting that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2522 - 2552
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Mariassunta Giannetti, Itay Goldstein, Umit Gurun, Jarrad Harford (the editor), Davidson Heath, Gerard Hoberg, Ben Iverson, Jiacui Li, Elena Patel, Matthew Ringgenberg, Nathan Seegert, Richard Thakor (the referee), and the seminar participants at Brigham Young University, the University of Iowa, the University of Texas at Dallas, The University of Utah, Michigan State University, Tulane University, and the 2019 FMA Doctoral Student Consortium for their helpful comments and suggestions.

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