Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

Sharing R&D Risk in Healthcare via FDA Hedges

Adam Jørring, Andrew W. Lo, Tomas Philipson, Manita Singh, Richard Thakor

The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We propose new and simple financial instruments, Food and Drug Administration (FDA) hedges, to allow medical R&D investors to better share the pipeline risk associated with FDA approval with broader capital markets.

Uncertainty, Financial Frictions, and Investment Dynamics

Simon Gilchrist, Jae W. Sim, Egon Zakrajˇsek

Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional “wait-and-see” effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes.

The Asset Pricing Implications of Government Economic Policy Uncertainty

Jonathan Brogaard, Andrew L. Detzel

Using the Baker, Bloom, and Davis (2013) news-based measure to capture economic policy uncertainty (EPU) in the United States, we find that when EPU increases by 1%, contemporaneous market returns fall by 5.5% and economy-wide monthly implied cost of equity capital rises by 85 basis points. The economy-wide dividend yield rises as well. We attribute the market-wide price decline to discount rate shocks, as dividends are unaffected for up to two years.

Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital

Brandon Julio, Youngsuk Sook

Government policy uncertainty has a dampening effect on foreign direct investment (FDI) around the world. Using the timing of national elections as a measure of exogenous fluctuations in policy uncertainty, we find that FDI flows from US companies to foreign affiliates drop significantly during election periods. The patterns in FDI flows are more pronounced in countries with higher propensities for policy reversals and when election outcomes are more uncertain.