R&D investment and distress risk

Wei Zhang

Journal of Empirical Finance, 2015, vol. 32, issue C, 94-114

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.

Keywords: R&D intensity; Inflexibility; Financial constraints (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:32:y:2015:i:c:p:94-114

DOI: 10.1016/j.jempfin.2015.03.009

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