Working Paper: NBER ID: w25202
Authors: Yujin Kim; Chirantan Chatterjee; Matthew J. Higgins
Abstract: Can regulation reduce risks associated with investing in early-stage firms? Using the passage of the European Orphan Drug Act (EU-ODA), we examine this question in the biopharmaceutical industry. We provide causal evidence that venture capitalists (VCs) are more likely to invest in early-stage firms operating in sub-fields disproportionately affected by EU-ODA. The switch to early-stage investments appears strongest among VCs that previously faced greater levels of information asymmetry. We also find that the level of syndication declined for early-stage investments and exit performance improved. We conclude discussing the implications of our findings for public policy, entrepreneurship and innovation.
Keywords: Venture Capital; Biopharmaceuticals; Regulation; Information Asymmetry; EU Orphan Drug Act
JEL Codes: G24; L51; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| EUODA (F53) | early-stage VC investments (G24) |
| EUODA (F53) | likelihood of investing in early-stage ventures (G24) |
| EUODA (F53) | timing of investments (G11) |
| EUODA (F53) | decline in syndication among early-stage investments (G24) |
| EUODA (F53) | improved exit performance (Y60) |
| EUODA (F53) | bankruptcy rates (K35) |