Multistage investment, systematic risk premium and CAPM beta: empirical evidence from product development

Recent theoretical literature suggests that the magnitude of the systematic risk premium for a multistage investment project is subject to various forces that may cause the premium to change across stages. To test this hypothesis, I investigate whether Capital Asset Pricing Model (CAPM) beta differs by product development stage in the biotechnology industry. To this end I estimate CAPM beta for various stages of drug development using Full-Information Beta (FIB) technique. Findings indicate that early stage drug development projects have higher CAPM beta than drugs in later stages of development or in production and marketing. The beta appears to decrease monotonically as a project approaches completion.