Trials And Terminations: Learning From Competitors' R&D Failures

I analyze project continuation decisions where firms may resolve uncertainty through news about competitors' research and development (R&D) failures, as well as through their own results. I examine the tradeoffs and interactions between product market competition and technological learning from parallel R&D projects. Leveraging the biopharmaceutical industry's unique characteristics to overcome barriers to measuring project-level responses, I use a difference-in-differences strategy to evaluate how competitor exit news alters a firm's own project discontinuation decisions. The findings reveal that technological learning dominates competition effects. Firms are most sensitive to competitor failure news from within the same market and same technology area-more than doubling their propensity to terminate drug development projects in the wake of this type of information. Finally, I explore how levels of competition, uncertainty, and opportunities to learn moderate the response to competitor failure news.