ShanghaiTech SEM Working Paper No. 2019-001
Yujin Kim
ShanghaiTech University
Chirantan Chatterjee
Indian Institute of Management Ahmedabad
Matthew J. Higgins
Georgia Institute of Technology & NBER
Yujin Kim
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, ourresults 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.hanghaiTech University
Keywords: venture capital, biopharmaceutical, investment, valley of death, regulation
Date Written: Ocotober, 2018
Available at SSRN: https://ssrn.com/abstract=3309496
It is also featured on the NBER home page (http://www.nber.org).
Download this paper: 
【No. 2019-001】Moving Beyond the Valley of Death Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms.pdf
