This research emerges with internal financial constraint. How financial constraint may lead to economic recess or back. This financial constraint is different than external finance constraint, and is not due to lack of gold, etc. It explains the positive relationship between excess return in stock market (ERSM) and non-real funding or riskier credit. The matter comes under imperfect market banking. It includes subsequently banking behavior and failure of central bank policy to control individual banks under these circumstances. In addition, it presents measures to get awareness before default comes, as financial default rare and crisis in financial market comes much before that.
Chapter 1 describes the book’s aims and scope. The main objective is to improve understanding of the Great Recession and its aftermath. The book provides a unified theoretical framework that uses dynamic general equilibrium models, or DGE, but dispenses with the rational expectations assumption. Its distinctive features are clean models with a rich institutional structure encompassing credit money, external finance, borrowing constraints, net worth, real estate, and commercial banks. Written for economists in universities, governments, and financial institutions, the book addresses an international audience.
When the accessibility of external finance prohibits a firm from taking the optimum decision related to investment, that firm is called financially constrained. By applying the methodology of Kaplan and Zingales (1997) and Lamont et al. (2001), the current study has created a construct to gauge the level of financial constraints (FC) of the companies which emanate from quantitative information. The study explores whether FC factor is present in the Indian stock market and explores whether the security returns of those firms that are financially constrained move in tandem. The study also attempts to establish the association between security returns and R&D of financially constrained firms. On a sample of 63 R&D reporting companies of S&P BSE 500, traded over the period March 2008 to February 2019, the study used the Fama–French methodology, fixed effect model and the ordered logistic regression. The study finds that firms that are highly constrained earn more returns than low constrained firms. Second, the security returns of firms that are financially constrained move in tandem because these firms are affected by common shocks. This suggests that the FC factor exists in the Indian stock market. Finally, when R&D interacts with the level of FC, then this interaction effect has a negative effect on returns.
Abstract
We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We introduce a new measure of drug novelty based on chemical similarity and show that firms face a risk-reward trade-off: novel drug candidates are less likely to obtain FDA approval but are based on more valuable patents. Consistent with a simple model of costly external finance, we show that a positive shock to firms’ net worth leads firms to develop more novel drugs. This suggests that even large firms may behave as though they are risk averse, reducing their willingness to investment in potentially valuable radical innovation.
Missing Novelty in Drug Development