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Financing decisions following negative shocks in the product market: A matrix-completion study of the U.S. pharmaceutical industry

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  • Biancalani, Francesco
  • Gnecco, Giorgio
  • Signori, Andrea
  • Vismara, Silvio

Abstract

We investigate whether firms adjust their financing policies in response to a negative shock affecting their product market. Focusing on the pharmaceutical industry, we leverage the U.S. Inflation Reduction Act (IRA) of 2022 as an exogenous shock, marking the government's inaugural authority to negotiate drug prices. Using a matrix completion approach, a supervised machine-learning methodology that allows to compare treatment outcomes against predicted counterfactual values in absence of the treatment, our analysis reveals that pharmaceutical firms react to this regulatory intervention by issuing more equity. This finding suggests that firms raise fresh capital to mitigate the adverse impact of IRA on the product market.

Suggested Citation

  • Biancalani, Francesco & Gnecco, Giorgio & Signori, Andrea & Vismara, Silvio, 2024. "Financing decisions following negative shocks in the product market: A matrix-completion study of the U.S. pharmaceutical industry," Economics Letters, Elsevier, vol. 243(C).
    • Handle: RePEc:eee:ecolet:v:243:y:2024:i:c:s0165176524004208
    DOI: 10.1016/j.econlet.2024.111936
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    References listed on IDEAS

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    1. Giambona, Erasmo & Golec, Joseph & Lopez-de-Silanes, Florencio, 2021. "Do Firms Purposefully Change Capital Structure? Evidence from an Investment-Opportunity Shock to Drug Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(3), pages 915-944, May.
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    More about this item

    Keywords

    Regulatory intervention; Capital raising; Pharmaceutical; Synthetic control method; Matrix completion; Inflation Reduction Act;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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