Published in:ShanghaiTech SEM Working Paper ; No. 2019-001
Extent:
1 Online-Ressource (64 p)
Language:
English
DOI:
10.2139/ssrn.3309496
Identifier:
Origination:
University thesis:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments Ocotober 2018 erstellt
Description:
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