Premature R&D alliance termination and shareholder returns: Evidence from the biopharmaceutical industry
Hadi Eslami, Kamran Eshghi, Farhad Sadeh
kHUB post date: June 28, 2023
Originally published: January 30, 2023 (PDMA JPIM • Vol 40, Issue 3 • May 2023)
Read time: 45 minutes
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Prior research has highlighted the performance implications of R&D alliances for innovation outcomes and the financial returns of firms. However, research on R&D alliances has yet to offer insights into how the premature termination of such alliances, before fulfilling their predetermined innovation objectives, affects the shareholder returns of the firm. Applying transaction cost economics (TCE) theory and real options (RO) logic to a post-formation alliance setting, we posit that premature termination of R&D alliances prompts relative volatility in investors' prospective benefits and risks. Employing an event study analysis method and using a sample of 116 premature alliance termination announcements in the biopharmaceutical industry, we observe an average negative abnormal stock return of 3.21% for focal firms. Further, our analyses reveal that investors respond even more adversely to alliances terminated unilaterally by the partner of the focal firm in which they invested than those terminated through mutual agreements or by the focal firm itself. Also, we find that alliance duration from formation to termination mitigates the negative effect of termination on shareholder returns.
Practitioner points
- By average premature termination of R&D alliances is negatively associated with shareholder stock returns. However, individual firms may experience different result depending on the focal firm, partner frim, and the alliance characteristics and conditions.
- Managers can mitigates the negative outcomes by playing an active role in terminating an R&D alliance. So If the alliance's termination is inevitable (e.g., due to its lack of value-creation or efficiency), managers need to consider terminating the alliance before their partners initiate it.
- Termination of recently formed alliances have more severe negative outcomes compared to older alliances. If the firm needs to prioritize its R&D projects and resources, managers need to focus on terminating longer alliances in duration as they imply that the firm has exhausted enough benefits in comparison with the probable termination costs.