Value effect of rival innovation failure: competition or contagion?

Figures & data

Figure 1. Price of Chongqing Brewery (Source: created by the authors from published data).

Table 1. Definition of variables.

Variable	Definition
CAR	Cumulative abnormal return, calculated by cumulating stock returns minus returns of the market index on the listing stock exchange in (–1, 1) event window. The event days are 2011.12.5-2011.12.8
Vaccine	A dummy variable equal to one if a firm’s R&D involves vaccine
Vaccine_Percent	The ratio of the investment in R&D projects on vaccine and the total investment in R&D projects in process
GBYM	A dummy variable equal to one if a firm’s R&D involves hepatic vaccine
QTYM	A dummy variable equal to one if a firm’s R&D involves non-hepatic vaccine
SWZP	A dummy variable equal to one if a firm’s R&D involves non-vaccine medicine
Log_Board	The natural logarithm of the size of board
Nwage	The proportion of board members that do not receive pay from the firm
Analyst recommendation	The mean of analyst recommendations in the 6 months before the announcement, equal to 5 if the recommendation is ‘strong buy’, equal to 4 if the recommendation is ‘buy’, equal to 3 if the recommendation is ‘neutral’, equal to 2 if the recommendation is ‘sell’, equal to 1 if the recommendation is ‘strong sell’
Analyst forecast dispersion	The dispersion of three-year growth rate of earnings per share forecast by analyst
Age	Number of years since a company’s initial public offering
ROA	Return on assets, measured as operating income scaled by total assets
Size	Company size, measured as the natural logarithm of total assets
Leverage	Financial leverage, measured as total liabilities, scaled by total assets

Figure 2. Cumulative abnormal return of rival firms around Chongqing Brewery’s announcement of failure in clinical trials.

Table 2. Summary statistics.

Variables	N	Mean	Std	Min	P1	P25	Median	P75	P99	Max
Panel A: Summary statistics of CAR
CAR	136	–2.33%***	4.25%	–11.67%	–9.93%	–5.56%	–2.69%***	–0.07%	7.13%	11.38%
		(–6.40)					(–7.40)
Panel B: Summary statistics of other variables
Vaccine	136	0.20	0.40	0.00	0.00	0.00	0.00	0.00	1.00	1.00
Vaccine _Percent	136	0.03	0.16	0.00	0.00	0.00	0.00	0.00	1.00	1.00
Age	136	7.90	6.10	0.00	0.00	1.00	7.50	13.00	19.00	20.00
ROA	136	0.10	0.09	–0.21	–0.17	0.05	0.09	0.13	0.30	0.40
Size	136	21.13	0.96	19.03	19.07	20.61	21.09	21.73	23.29	23.55
Leverage	136	0.32	0.20	0.01	0.02	0.16	0.30	0.44	0.87	1.17
GBYM	136	0.07	0.26	0.00	0.00	0.00	0.00	0.00	1.00	1.00
QTYM	136	0.13	0.33	0.00	0.00	0.00	0.00	0.00	1.00	1.00
SWZP	136	0.43	0.50	0.00	0.00	0.00	0.00	1.00	1.00	1.00
Board	136	9.37	1.87	5.00	5.00	9.00	9.00	10.50	15.00	15.00
Nwage	136	0.14	0.13	0.00	0.00	0.00	0.11	0.23	0.43	0.44
Analyst recommendation	111	1.02	0.44	0.00	0.00	0.88	1.00	1.29	2.00	2.00
Analyst forecast dispersion	101	0.09	0.08	0.00	0.01	0.04	0.06	0.10	0.37	0.64

Notes: This table presents summary statistics of cumulative abnormal return (CAR) of rival firms around CB’s announcement of R&D failure (Panel A) and other variables (Panel B). Definitions of variables are in Table 1. t-statistics are given in brackets with * denotes significant at the 10% level, ** denotes significant at the 5% level and *** denotes significant at the 1% level.

Table 3. Correlation matrix.

	CAR	Vaccine	Vaccine_Percent	GBYM	QTYM	SWZP	Log_Board	Nwage	Analyst forecast dispersion	Analyst recommendation	Age	ROA	Size	Leverage
CAR	1.000	–0.158*	–0.202**	–0.099	–0.112	–0.025	0.059	0.015	0.016	0.068	–0.037	0.164*	–0.079	–0.042
Vaccine		1.000	0.368***	0.566***	0.759***	–0.436***	–0.049	–0.053	–0.081	–0.064	0.036	0.040	0.198**	0.048
Vaccine_Percent			1.000	0.293***	0.213**	–0.160*	–0.022	–0.042	0.241	–0.067	–0.143*	0.028	0.083	–0.139
GBYM				1.000	–0.106	–0.247***	0.016	–0.162*	–0.101	–0.130	0.005	0.134	0.136	–0.075
QTYM					1.000	–0.331***	–0.071	0.064	–0.016	0.022	0.039	–0.058	0.131	0.117
SWZP						1.000	–0.052	–0.048	0.123	–0.168*	–0.068	0.100	–0.129	0.056
Log_Board							1.000	0.157*	–0.130	–0.069	–0.185**	0.243***	–0.080	0.045
Nwage								1.000	–0.096	–0.024	0.122	–0.174**	–0.040	0.060
Analyst forecast dispersion									1.000	–0.149	0.070	–0.400***	–0.144	0.094
Analyst recommendation										1.000	0.040	0.095	0.239**	0.050
Age											1.000	–0.375***	0.317***	0.466***
ROA												1.000	–0.034	–0.396***
Size													1.000	0.076
Leverage														1.000

Notes: This table presents correlation matrix of all variables. Definitions of variables are in Table 1. * denotes significant at the 10% level, ** denotes significant at the 5% level and *** denotes significant at the 1% level.

Table 4. Regressing CAR on Vaccine dummy.

	CAR
	Coefficient	t-value
Intercept	0.021	0.24
Vaccine	–0.017*	–1.80
Age	0.000	0.46
ROA	0.098**	2.06
Size	–0.002	–0.63
Leverage	0.005	0.26
Adjusted R^2	2.30%
F-test	0.16
N	136

Note: This table reports the results of model (1), and the definitions of variables are in Table 1. * denotes significant at the 10% level, **denotes significant at the 5% level and ***denotes significant at the 1% level.

Table 5. The role of uncertainty.

	CAR
	(1) Analyst forecast dispersion	(2) Analyst recommendation
Intercept	–0.098	–0.027
	(–0.79)	(–0.25)
Vaccine	0.012	–0.062***
	(0.75)	(–2.79)
Vaccine*Uncertainty	–0.434**	0.043**
	(–2.27)	(2.11)
Uncertainty	1.169	–0.008
	(2.20)	(–0.78)
Age	0.000	0.001
	(0.47)	(0.89)
ROA	0.169**	0.136***
	(2.14)	(2.76)
Size	0.002	–0.000
	(0.44)	(–0.01)
Leverage	–0.020	–0.016
	(–0.75)	(–0.61)
Adjusted R^2	7.33%	7.90%
F-test	0.05	0.03
N	101	111

Notes: This table reports results of model (2), and uncertainty is measured with Analyst forecast dispersion and Analyst recommendation. The definitions of variables are in Table 1. t-statistics are given in brackets with *denotes significant at the 10% level, **denotes significant at the 5% level and ***denotes significant at the 1% level.

Table 6. The role of corporate governance.

	CAR
	(1) Log_Board	(2) Nwage
Intercept	–0.021	–0.010
	(–0.22)	(–0.12)
Vaccine	0.345***	0.005
	(2.68)	(0.43)
Vaccine*Weak Governance	–0.164***	–0.182**
	(–2.81)	(–2.40)
Weak Governance	0.021	0.045
	(1.04)	(1.39)
Age	0.000	0.000
	(0.31)	(0.30)
ROA	0.075	0.109**
	(1.56)	(2.30)
Size	–0.003	–0.001
	(–0.70)	(–0.39)
Leverage	0.009	0.016
	(0.41)	(0.76)
Adjusted R^2	6.50%	5.10%
F-test	0.03	0.06
N	136	136

Note: This table reports results of the following OLS regressions:

CAR = Vaccine + Vaccine*Weak Governance + Weak Governance + Controls, Weak Governance is weak corporate governance measured by Log_Board and Nwage. All the definitions of variables are in Table 1. t-statistics are given in brackets with *denotes significant at the 10% level, **denotes significant at the 5% level and ***denotes significant at the 1% level.

Table 7. Market reactions of rival companies to the progress of CB’s R&D project.

Event	Passed the test of the Bio-Med Bureau	Initiation of clinical test	Completion of Phase I clinical test
Date of announcement	Jan19, 2002	Nov 28, 2003	Jun28, 2005
Mean of CAR for rivals	–0.54%	0.34%	–0.37%
T value	–0.53	0.54	–0.47
# of Rivals	62	66	77

Note: This table presents market reactions on rival companies to the progress of Chongqing Brewery’s R&D project, including passing the test of the Bio-Med Bureau (19 January 2002), initiation of clinical test (28 November 2003) and completion of Phase I clinical test (28 June 2005). Event window is (–5, 5).

Table 8. Alternative measures of Vaccine.

	CAR
	Column 1	Column2
Intercept	0.028	0.028
	(0.34)	(0.34)
GBYM	–0.028*
	(–1.89)
QTYM	–0.021*
	(–1.79)
SWZP	–0.013
	(–1.60)
Vaccine_Percent		–0.052**
		(–2.30)
Age	0.000	0.000
	(0.39)	(0.21)
ROA	0.112**	0.086*
	(2.32)	(1.82)
Size	–0.002	–0.003
	(–0.68)	(–0.70)
Leverage	0.010	–0.001
	(0.47)	(–0.06)
Adjusted R^2	2.80%	3.74%
F-test	0.16	0.08
N	136	136

Notes: This table reports results of the following OLS regression:

CAR = Alternative Measures on Vaccine + Controls, and the definitions of variables are in Table 1. *Denotes significant at the 10% level, **denotes significant at the 5% level and ***denotes significant at the 1% level.