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Moving beyond the valley of death : regulation and venture capital investments in early-stage biopharmaceutical firms

Author: Yujin Kim; Chirantan Chatterjee; Matthew J Higgins; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2018.
Series: Working paper series (National Bureau of Economic Research), no. 25202.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Venture capitalists (VCs) traditionally invest in risky, early-stage innovations. Recent research suggests, however, that VCs may be herding into less risky, later-stage projects. Such a shift can create funding gaps for early-stage firms. Can regulation reverse this trend by providing information that may reduce the risk of early-stage investments? Using the regulatory setting of the European Union and the passage  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Yujin Kim; Chirantan Chatterjee; Matthew J Higgins; National Bureau of Economic Research,
OCLC Number: 1061574986
Notes: "October 2018"
Description: 1 online resource (63 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 25202.
Responsibility: Yujin Kim, Chirantan Chatterjee, Matthew J. Higgins.

Abstract:

Venture capitalists (VCs) traditionally invest in risky, early-stage innovations. Recent research suggests, however, that VCs may be herding into less risky, later-stage projects. Such a shift can create funding gaps for early-stage firms. Can regulation reverse this trend by providing information that may reduce the risk of early-stage investments? Using the regulatory setting of the European Union and the passage of the Orphan Drug Act (EU-ODA), we examine this question in the biopharmaceutical industry. We provide causal evidence that VCs are more likely to invest in early-stage biopharmaceutical firms operating in sub-fields disproportionately affected by EU-ODA. We also find that the level of syndication declined for early-stage investments and exit performance improved. Importantly, the shift towards early-stage investment did not lead to any higher proportion of bankruptcies. Collectively, our results suggest that the information provided by EU-ODA helped alleviate information asymmetries faced by VCs investing in early-stage biopharmaceutical firms. We conclude by discussing implications for entrepreneurial finance and innovation policy.

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