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Corporate innovation, default risk, and bond pricing

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  • Hsu, Po-Hsuan
  • Lee, Hsiao-Hui
  • Liu, Alfred Zhu
  • Zhang, Zhipeng

Abstract

We propose firm-level innovation performance to be an important determinant of corporate creditworthiness and examine this relation from the perspective of bond investors. We find that firms' default probabilities are negatively related to the quantity, impact, originality, and generality of their patent portfolios. Moreover, bonds issued by more innovative firms have lower issuance premiums and lower realized excess returns. Our findings are further supported by instrumental regressions that use monetary and time costs of innovation, and by difference-in-differences tests based on exogenous shocks from state-level R&D tax credits.

Suggested Citation

  • Hsu, Po-Hsuan & Lee, Hsiao-Hui & Liu, Alfred Zhu & Zhang, Zhipeng, 2015. "Corporate innovation, default risk, and bond pricing," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 329-344.
    • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:329-344
    DOI: 10.1016/j.jcorpfin.2015.09.005
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    More about this item

    Keywords

    Innovation; Patent; Default risk; Bond premium; Bond return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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