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R&D investment and distress risk

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  • Zhang, Wei

Abstract

This paper proposes that besides volatility, R&D can increase firms' distress risk through another channel. Unlike capital investment, R&D is more inflexible and subject to high adjustment costs. Moreover, R&D intensive firms face severe financial constraints and are more likely to suspend/discontinue R&D projects. Therefore, firms' distress risk increases with their R&D intensity. Using a large panel of US companies over the 1980 to 2011 period, I find a robust empirical relation between R&D and distress risk, primarily among financially constrained firms. Moreover, the effect of R&D on distress risk is magnified during economic downturns. I also find that firms that have been previously successful in R&D or firms with high analyst coverage can mitigate the relationship between R&D and distress risk.

Suggested Citation

  • Zhang, Wei, 2015. "R&D investment and distress risk," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 94-114.
    • Handle: RePEc:eee:empfin:v:32:y:2015:i:c:p:94-114
    DOI: 10.1016/j.jempfin.2015.03.009
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    More about this item

    Keywords

    R&D intensity; Inflexibility; Financial constraints;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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