Financial market reaction to R&D volatility in the pharmaceutical industry. A multi-country study
Abstract
Corporate management is often accused of short-term oriented behaviour related to R&D expenditures. This study analyses the influence of R&D volatility and R&D intensity on the market capitalization of pharmaceutical and medical research companies from Europe, considering the institutional context and several firm characteristics. Panel regression estimations on a sample of 217 companies for 2014–2019 indicate that R&D volatility adversely affects market value. The analysis is conducted on the entire sample and on sub-samples determined based on the positive and negative values of the R&D volatility. This differentiates between the continuous and the disrupting effect of R&D activities and the firm’s shift between exploratory and exploitative innovations. The positive volatility sub-sample provides consistent evidence of a significant negative influence of the R&D volatility on the market value. For the negative volatility sub-sample, R&D intensity and its interaction with R&D volatility have a significant positive effect, consistent over the alternative estimations. We conclude that the market influence of the R&D expenditure is related to the sign of volatility and depends on the proportion of R&D expenditure, especially when the volatility is negative. Our findings provide valuable insights for managers, investors, analysts, and other stakeholders about the market reaction to R&D volatility.
Keyword : R&D volatility, R&D intensity, market value, positive volatility, negative volatility, corporate management
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Ahmadi, A., & Bouri, A. (2019). The effect of audit quality on the extent of voluntary disclosure: Companies listed in the Tunisian Stock Exchange. Journal of the Knowledge Economy, 10, 59–73. https://doi.org/10.1007/s13132-016-0444-y
Arslan-Ayaydin, Ö., Barnum, D. T., Karan, M. B., & Ozdemir, A. (2014). How is moral hazard related to financing R&D and innovations?. European Research Studies Journal, 17(4), 111–131. https://doi.org/10.2139/ssrn.2377788
Baber, W. R., Fairfield, P. M., & Haggard, J. A. (1991). The effect of concern about reported income on discretionary spending decisions: the case of research and development. Accounting Review, 66, 818–829. https://doi.org/10.1016/j.jacceco.2006.01.002
Bentata, P. (2016). Médicaments innovants: les prix sont‐ils trop élevés?. Note économique de l’IEM, Institut Économique Molinari. https://www.institutmolinari.org/2016/10/03/medicaments-innovants-les-prix-sont-ils-trop-eleves/
Bowman, E. H., & Hurry, D. (1993). Strategy through the option lens: an integrated view of ressource investments and the incremental-choice process. Academy of Management Review, 18(4), 760–782. https://doi.org/10.2307/258597
Brown, N. C., Smith, J. D., White, R. M., & Zutter, C. J. (2021). Political corruption and firm value in the U.S.: Do rents and monitoring matter?. Journal of Business Ethics, 168(2), 335–351. https://doi.org/10.1007/s10551-019-04181-0
Bustinza, O. F., Gomes, E., Vendrell-Herrero, F., & Baines, T. (2017). Product-service innovation and performance: The role of collaborative partner-ships and R&D intensity. R&D Management, 49(1), 33–45. https://doi.org/10.1111/radm.12269
Cohen, W. M., & Walsh, J. P. (2000). R&D spillovers, appropriability and R&D intensity. The Economic Evaluation of Technological Change, 75, 22–29. https://doi.org/10.1007/s007120200000
Coluccia, D., Dabić, M., Del Giudice, M., Fontana, S., & Solimene, S. (2020). R&D innovation indicator and its effects on the market. An empirical assessment from a financial perspective. Journal of Business Research, 119, 259–271. https://doi.org/10.1016/j.jbusres.2019.04.015
Dalwai, T., & Mohammadi, S. S. (2020). Intellectual capital and corporate governance: An evaluation of Oman’s financial sector companies. Journal of Intellectual Capital, 21(6), 1125–1152. https://doi.org/10.1108/JIC-09-2018-0151
Dargenidou, C., Jackson, R. H. G., Tsalavoutas, I., & Tsoligkas, F. (2021). Capitalisation of R&D and the informativeness of stock prices: Pre and post IFRS evidence. The British Accounting Review, 53(4), 1–55. https://doi.org/10.1016/j.bar.2021.100998
Demirel, P., & Mazzucato, M. (2012). Innovation and firm growth: Is R&D worth it?. Industry and Innovation, 19(1), 45–62. https://doi.org/10.1080/13662716.2012.649057
Duppati, G., Sune, S., & Navajyoti, S. (2017). Corporate governance, research and development volatility and firm performance – Evidence from Spain and Ireland. Cogent Economics & Finance, 5(1), 1317117. https://doi.org/10.1080/23322039.2017.1317117
European Commission. (2021). EU industrial R&D investment scoreboard. https://op.europa.eu/en/publication-detail/-/publication/fb50fc5e-570e-11ec-91ac-01aa75ed71a1/language-en
Galindo-Rueda, F., & Verger, F. (2016). OECD taxonomy of economic activities based on R&D intensity (Technology and Industry Working Papers No. 2016/04). OECD Science.
Garattini, L., Finazzi, B., & Mannucci, P. M. (2022). Pharmaceutical pricing in Europe: Time to take the right direction. Internal and Emergency Medi-cine, 17, 945–948. https://doi.org/10.1007/s11739-022-02960-8
Gascón, F., Lozano, J., Ponte, B., & de la Fuente, D. (2017). Measuring the efficiency of large pharmaceutical companies: An industry analysis. Euro-pean Journal of Health Economics, 18(5), 587–608. https://doi.org/10.1007/s10198-016-0812-3
Greve, R. H. (2007). Exploration and exploitation in product innovation. Industrial and Corporate Change, 16(5), 945–975. https://doi.org/10.1093/icc/dtm013
Gharbi, S., Sahut, J. M., & Teulon, F. (2014). Research & development and volatility of equity returns in the French market (Working Paper 2014-120). Ipag Business School.
Gino, F., & Pisano, G. P. (2006). Do manager’s heuristics affect R&D performance volatility?: A simulation informed by the pharmaceutical industry (HBS Working Paper 05-015). Harvard Business School.
Guo, X., Li, K., Yu, S., & Wei, B. (2021). Enterprises’ R&D investment, venture capital syndication and IPO underpricing. Sustainability, 13(13), 7290. https://doi.org/10.3390/su13137290
Hai, B., Gao, Q., Yin, X., & Chen, J. (2019). R&D volatility and market value: The role of executive overconfidence. Chinese Management Studies, 14(2), 411–431. https://doi.org/10.1108/CMS-05-2019-0170
Hall, B. H., & Lerner, J. (2010). The financing of R&D and innovation. In B. H. Hall & N. Rosenberg (Eds.), Handbook of the economics of innovation (Vol. 1, pp. 609–639). North Holland. https://doi.org/10.1016/S0169-7218(10)01014-2
Hall, B. H., Moncada-Paternò-Castello, P., Montresor, S., & Vezzani, A. (2016). Financing constraints, R&D investments and innovative performanc-es: New empirical evidence at the firm level for Europe. Economics of Innovation and New Technology, 25(3), 183–196. https://doi.org/10.1080/10438599.2015.1076194
Howells, J., Gagliardi, D., & Malik, K. (2008). The growth and management of R&D outsourcing: Evidence from UK pharmaceuticals. R&D Manage-ment, 38(2), 205–219. https://doi.org/10.1111/j.1467-9310.2008.00508.x
Ibhagui, O. (2019). Do large firms benefit more from R&D investment?. The European Journal of Applied Economics, 16(2), 155–173. https://doi.org/10.5937/EJAE16-21770
Jeny, A., & Moldovan, R. (2018). Recognition and disclosure of intangible assets – a meta-analysis review. SSRN. https://doi.org/10.2139/ssrn.3120397
Jiang, Y., Wang, D., & Zeng, Q. (2021). Can founders’ dual roles facilitate innovation? – from the perspective of founders’ R&D network characteris-tics. Journal of Business Economics and Management, 22(5), 1288–1307. https://doi.org/10.3846/jbem.2021.14950
Kang, T., Baekb, Ch., & Lee, J. D. (2017). The persistency and volatility of the firm R&D investment: Revisited from the perspective of technological capability. Research Policy, 46, 1570–1579. https://doi.org/10.1016/j.respol.2017.07.006
Karbowski, A. (2019). Cooperative and non-cooperative R&D in product innovation and firm performance. Journal of Business Economics and Man-agement, 20(6), 1121–1142. https://doi.org/10.3846/jbem.2019.11050
Kim, J. M., Yang, I., Yang, T., & Koveos, P. (2020). The impact of R&D intensity, financial constraints, and dividend payout policy on firm value. Finance Research Letters, 40, 101802. https://doi.org/10.1016/j.frl.2020.101802
Kim, W. S., Park, K., Lee, S. H., & Kim, H. (2018). R&D investments and firm value: Evidence from China. Sustainability, 10(11), 4133. https://doi.org/10.3390/su10114133
Koh, P. S., & Reeb, D. M. (2015). Missing R&D. Journal of Accounting and Economics, 60(1), 73–94. https://doi.org/10.1016/j.jacceco.2015.03.004
Kothari, S. P., Laguerre, T. E., & Leone, A. J. (2002). Capitalization versus expensing: Evidence on the uncertainty of future earnings from capital ex-penditures versus R&D outlays. Review of Accounting Studies, 7, 355–382. https://doi.org/10.1023/A:1020764227390
Lakhal, N., & Dedaj, B. (2020). R&D disclosures and earnings management: The moderating effects of IFRS and the global financial crisis. Journal of Financial Reporting and Accounting, 18(1), 111–130. https://doi.org/10.1108/JFRA-10-2019-0129
Lee, C. M. C., & Ng, D. (2006). Corruption and international valuation: Does virtue pay? (Research Paper No. 41-06). Johnson School. https://doi.org/10.2139/ssrn.945629
Lev, B., Radhakrishnan, S., & Tong, J. (2016). R&D volatility drivers (FIRN Research Paper No. 2763369). SSRN. https://doi.org/10.2139/ssrn.2763369
Lev, B., Radhakrishnan, S., & Tong, J. Y. (2021). Earnings component volatilities: Capital versus R&D expenditures. Production and Operations Management, 30(5), 1475–1492. https://doi.org/10.1111/poms.13333
Li, D. (2011). Financial constraints, R&D investment, and stock returns. Review of Financial Studies, 24(9), 2974–3007. https://doi.org/10.1093/rfs/hhr043
Lo, A. W., & Thakor, R. T. (2021). Financing medical innovation (CSM Working Paper Series). Carlson School of Management.
Mace, C. (2020). The real effects of secondary markets on innovation. https://doi.org/10.2139/ssrn.3348102
Markus, A., & Swift, T. (2020). Corporate governance and the impact to the R&D lab. Journal of Strategy and Management, 13(1), 91–110. https://doi.org/10.1108/JSMA-06-2019-0100
Mazzi, F., Slack, R., Tsalavoutas, I., & Tsoligkas, F. (2019). Country-level corruption and accounting choice: Research & development capitalization under IFRS. The British Accounting Review, 51(5), 100821. https://doi.org/10.1016/j.bar.2019.02.003
Mazzucato, M., & Tancioni, M. (2013). R&D, Patents and stock return volatility. In A. Pyka, & E. Andersen (Eds.), Long term economic development. Economic complexity and evolution (pp. 341–362). Springer. https://doi.org/10.1007/978-3-642-35125-9_15
Mozafari, S. (2017). The impact of R&D expenditure volatility on stock return of the listed companies in Tehran stock exchange. Specialty Journal of Accounting and Economics, 3(2), 7–11.
Mudambi, R., & Swift, T. (2011). Proactive R&D management and firm growth: A punctuated equilibrium model. Research Policy, 40(3), 429–440. https://doi.org/10.1016/j.respol.2010.10.014
Nandy, M. (2022). Impact of R&D activities on the financial performance: Empirical evidence from Indian pharmaceutical companies. International Journal of Pharmaceutical and Healthcare Marketing, 16(2), 182–203. https://doi.org/10.1108/IJPHM-08-2020-0067
Patel, C. P., Guedes, M. J., Soares, N., & da Conceição Gonçalves, V. (2018). Strength of the association between R&D volatility and firm growth: The roles of corporate governance and tangible asset volatility. Journal of Business Research, 88, 282–288. https://doi.org/10.1016/j.jbusres.2017.12.033
Paul, S. M., Mytelka, D. S., Dunwiddie, C. T., Persinger, C. C., Munos, B. H., Lindborg, S. R., & Schacht, A. L. (2010). How to improve R&D productivity: The pharmaceutical industry’s grand challenge. Nature Reviews Drug Discovery, 9(3), 203–214. https://doi.org/10.1038/nrd3078
Peña, O. I. G., López Zavala, M. Á., & Cabral Ruelas, H. (2021). Pharmaceuticals market, consumption trends and disease incidence are not driving the pharmaceutical research on water and wastewater. International Journal of Environmental Research and Public Health, 18(5), 2532. https://doi.org/10.3390/ijerph18052532
Pennetier, C., Girotra, K., & Mihm, J. (2018). R&D Spending: Dynamic or persistent ? (INSEAD Working Paper No. 2018/03/TOM). INSEAD. https://doi.org/10.2139/ssrn.2671828
Sanford, A., & Yang, M. J. (2022). Corporate investment and growth opportunities: The role of R&D-capital complementarity. Journal of Corporate Finance, 72, 102130. https://doi.org/10.1016/j.jcorpfin.2021.102130
Su, C. Y., Guo, Y. N., Chai, K. C., & Kong, W. W. (2021). R&D investments, debt capital, and ownership concentration: A three-way interaction and lag effects on firm performance in China’s pharmaceutical industry. Frontiers in Public Health, 9. https://doi.org/10.3389/fpubh.2021.708832
Swift, T. (2013). R&D expenditure volatility and firm performance: Organizational and environmental contexts. International Journal of Innovation and Technology Management, 10(04), 1350013. https://doi.org/10.1142/S0219877013500132
Thakor, R. T., & Lo, A. W. (2017). Optimal financing for R&D-intensive firms (NBER Working Paper Series w23831). National Bureau of Economic Research. https://doi.org/10.3386/w23831
Thakur, B. P. S., Kannadhasan, M., Charan, P., & Gupta, C. P. (2021). Corruption and firm value: Evidence from emerging market economies. Emerg-ing Markets Finance and Trade, 57(4), 1182–1197. https://doi.org/10.1080/1540496X.2019.1613643
Tong, Y. J., & Zhang, F. (2014). More evidence that corporate R&D investment (and effective boards) can increase firm value. Journal of Applied Corporate Finance, 26(2), 94–100. https://doi.org/10.1111/jacf.12071
Wang, G., Wang, Y., Ju, X., & Rui, X. (2022). Effects of political networking capability and strategic capability on exploratory and exploitative innova-tion: evidence from traditional manufacturing firms in China. Journal of Manufacturing Technology Management, 33(3), 618–642. https://doi.org/10.1108/JMTM-07-2021-0237
Xiang, E., Gasbarro, D., Cullen, G., & Ruan, W. (2020). Does R&D expenditure volatility affect stock return?. Journal of Contemporary Accounting and Economics, 16(3), 100211. https://doi.org/10.1016/j.jcae.2020.100211
Xu, B. (2006). R&D progress, stock price volatility, and post-announcement drift: An empirical investigation into biotech firms. Review of Quantitative Finance and Accounting, 26, 391–408. https://doi.org/10.1007/s11156-006-7439-x
Zhang, Z., & Luo, T. (2020). Network capital, exploitative and exploratory innovations – from the perspective of network dynamics. Technological Forecasting and Social Change, 152, 119910. https://doi.org/10.1016/j.techfore.2020.119910