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
How to Cite
Mironiuc, M., Huian, M. C., Țaran, A., & Curea, M. (2022). Financial market reaction to R&D volatility in the pharmaceutical industry. A multi-country study. Journal of Business Economics and Management, 23(5), 1234–1256. https://doi.org/10.3846/jbem.2022.17844
This work is licensed under a Creative Commons Attribution 4.0 International License.
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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
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