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Pharmaceutical R&D Spending and Threats of Price Regulation

Published online by Cambridge University Press:  26 November 2009

Joseph Golec
Affiliation:
School of Business, University of Connecticut, 2100 Hillside Rd., Unit-1041F, Storrs, CT 06269. jgolec@business.uconn.edu
Shantaram Hegde
Affiliation:
School of Business, University of Connecticut, 2100 Hillside Rd., Unit-1041F, Storrs, CT 06269. shegde@business.uconn.edu
John A. Vernon
Affiliation:
Gillings School of Global Public Health, University of North Carolina at Chapel Hill, CB 7411, Chapel Hill, NC 27713 and NBER. vernon@email.unc.edu

Abstract

Do threats of pharmaceutical price regulation affect subsequent research and development (R&D) spending? This study uses the Clinton administration’s Health Security Act (HSA) of 1993 as a natural experiment to study this issue. We link events surrounding the HSA to pharmaceutical stock price changes and then examine the cross-sectional relation between firms’ stock price changes and their subsequent unexpected R&D spending changes. Results show that the HSA had significant negative effects on stock prices and firm-level R&D spending. Conservatively, the HSA reduced R&D spending by about $1 billion even though it never became law.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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