The Effects of R&D Expenditures on Bondholders

Zhan Jiang, Kenneth Kim and Carl Hsin-Han Shen

A chapter in Advances in Financial Economics, 2012, pp 127-148 from Emerald Group Publishing Limited

Abstract: Purpose – The relation between research and development (R&D) expenditures and bondholder wealth is examined. Methodology/approach – A sample of firms that increase R&D expenditures is partitioned into two subsamples: firms with high default risk versus firms with low default risk. For each subsample, we examine the effect of R&D increases on bond returns and default risks. Findings – For firms with high default risk, R&D increases have a negative impact on bond returns and default risk. Further, there is a wealth transfer from bondholders to stockholders surrounding R&D increases. Neither of these results is found for firms with low default risk. Research limitations/implications – The present study highlights the importance of assessing firm's existing default risk to understand the effects that R&D expenditures have on bondholders. Social implications – The study reveals a potential social welfare and economic cost, as it reveals that stockholders may be able to gain wealth at the expense of bondholders. Originality/value – The study provides important insights to bondholders on how firms’ investment policies, such as R&D expenditures, may affect their wealth.

Keywords: R&D; bondholders; default risk (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afeczz:s1569-3732(2012)0000015007

DOI: 10.1108/S1569-3732(2012)0000015007

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