Premature R&D alliance termination and shareholder returns: Evidence from the biopharmaceutical industry

Prior research has highlighted the performance implications of R&D alliances for innovation outcomes and the financial returns of firms. However, research on R&D alliances has yet to offer insights into how the premature termination of such alliances, before fulfilling their predetermined innovation objectives, affects the shareholder returns of the firm. Applying transaction cost economics (TCE) theory and real options (RO) logic to a post-formation alliance setting, we posit that premature termination of R&D alliances prompts relative volatility in investors' prospective benefits and risks. Employing an event study analysis method and using a sample of 116 premature alliance termination announcements in the biopharmaceutical industry, we observe an average negative abnormal stock return of 3.21% for focal firms. Further, our analyses reveal that investors respond even more adversely to alliances terminated unilaterally by the partner of the focal firm in which they invested than those terminated through mutual agreements or by the focal firm itself. Also, we find that alliance duration from formation to termination mitigates the negative effect of termination on shareholder returns.