Abstract
We examine the relationship between corporate misconduct and pharmaceutical firm innovation and performance. Pharmaceutical firms obtain significantly fewer new product approvals by the U.S. Food and Drug Administration (FDA) following corporate regulatory violations, lawsuits, and Securities and Exchange Commission (SEC) regulatory enforcement actions. We also examine the potential reasons why innovative capacity is reduced for culpable firms. Following instances of misconduct, pharmaceutical firms are 50 percent less likely to engage in business expansions, engage in significantly fewer new strategic alliances and partnerships, and are awarded fewer government R&D grants. We attribute these results to the reputational loss associated with public knowledge of corporate misconduct. In support of this hypothesis, we find pharmaceutical firms experience negative cumulative abnormal stock returns (CARs) surrounding SEC enforcement announcements, and misconduct incidents increase the probability of analyst concerns. Overall, our results are consistent with the reputational loss associated with corporate misconduct being an important factor in future reductions in pharmaceutical firm innovative capacity.
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•Corporate misconduct reduces the future innovative capacity of pharmaceutical firms.•Firms experience post misconduct reductions in FDA product approvals and patents.•Reduced post-misconduct innovation is associated with reputational affects.•Pharmaceutical firms engage in fewer business partnerships following misconduct.•Misconduct results in substantial negatives CARs and increased analyst concerns.