Joseph H. Golec

Bettors Love Skewness, Not Risk, at the Horse Track

Studies of horse race betting have empirically established a long shot anomaly; that is, low‐probabiliy, high‐variance bets (long shots) provide low mean returns and high‐probability, lowvariance bets provide relatively high mean returns. Because bettors willingly accept low‐return, high‐variance bets, researchers conclude that bettors are risk lovers. In this study, we show that the data are at least as consistent with risk aversion as they are with risk loving when one explicitly considers the skewness of bet returns. Because the variance and skewness of bet returns are highly correlated, bettors may appear to prefer variance when it is skewness that they crave.

Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship

This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investors receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisors information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.

Drug development costs when financial risk is measured using the Fama–French three‐factor model

In a widely cited article, DiMasi, Hansen, and Grabowski (2003) estimate the average pre-tax cost of bringing a new molecular entity to market. Their base case estimate, excluding post-marketing studies, was

Comparing uninsured and privately insured hospital patients: admission severity, health outcomes and resource use.

802 million (in

European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending

US 2000). Strikingly, almost half of this cost (or

Do Investors See Through Mistakes in Reported Earnings

399 million) is the cost of capital (COC) used to fund clinical development expenses to the point of FDA marketing approval. The authors used an 11% real COC computed using the capital asset pricing model (CAPM). But the CAPM is a single factor risk model, and multi-factor risk models are the current state of the art in finance. Using the Fama-French three factor model we find that the cost of drug development to be higher than the earlier estimate.

Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms

This paper compares uninsured hospital patients with privately insured patients in terms of severity of illness on admission, emergency department use, leaving the hospital against medical advice, length of stay, and in-hospital mortality and morbidity rates. This cross-sectional study includes 29 237 admissions to 100 US hospitals in 1993 and 1994. We found that uninsured patients are sicker, indicating that hospitals should expect uninsured patients to have increased service needs. Our results indicate that the uninsured exhibit higher likelihood of leaving against medical advice, shorter lengths of stay and poorer health outcomes suggest that the uninsured may not be receiving necessary care. Further studies are needed.

Economic Evaluation and Cost-Effectiveness Thresholds: Signals to Firms and Implications for R&D Investment and Innovation

EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms. Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D). Some differences have increased over time. In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Real Option Value and Path Dependence in Oncology Innovation

This study investigates whether investors see through materially misstated earnings, and whether they anticipate earnings restatements. For firms that restate at least one annual report, we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements. Investors react positively to the component of the favorable earnings surprise that will subsequently be restated, and they attach the same valuation to it as to the true earnings surprise. We also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement, so that the full impact of a restatement is about three times as large as the restatement announcement effect. Indeed, we show that investors punish restating firms because the stock price gains that shareholders enjoy when firms initially announce overstated earnings are more than reversed by the time of the restatement announcement.

Comparative Effectiveness Regulations and Pharmaceutical Innovation

EU countries closely regulate pharmaceutical prices, whereas theUS does not.This paper shows how price constraints affect the profitability, stock returns and R&D spending of EU and US firms. Compared with EU firms, US firms are more profitable, earn higher stock returns and spend more on R&D.We tested the relationship between price regulation and R&D spending, and estimated the costs of tight EU price regulation. Although results show that EU consumers enjoyed much lower pharmaceutical price inflation, we estimated that price controls cost EU firms 46 fewer new medicines and 1680 fewer research jobs during our 19-year sample period.Had theUS used controls similar to those used in the EU,we estimate itwould have led to 117 fewer new medicines and 4368 fewer research jobs in the US.