The importance of relation-specific investments in capital structure decision: the case of the biopharmaceutical industry

According to capital structure literature, bilateral relationships with external partners have a strong impact on a firm’s financing decisions because they involve relation-specific investments that would lose most of their value in case of liquidation. By adjusting their capital structure firms can reduce liquidation risks and incentive their partners to undertake such investments. In this paper we extend these arguments to strategic alliances in the context of biotechnology industry, where bilateral relationships are formed to advance the commercialization of innovation and R-S investments are a primary issue. We investigate alliances heterogeneity and analyze whether partnerships possessing different characteristics exert a different impact on capital structure. We find that capital structure implications are relevant only for biotech firms placing a long-term strategic emphasis on the use of alliances. Moreover, this relation is especially important for agreements focused on R&D activities and signed with downstream players. These results confirm the importance of capital structure decisions in bilateral relationships and add to previous literature by clarifying when these decisions are more valuable in the context of strategic alliances formation.