The effects of R&D expenditures on bondholders

Zhan Jiang, Kenneth A. Kim, Carl Hsin Han Shen

Research output: Chapter in Book/Report/Conference proceedingChapter


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.

Original languageEnglish
Title of host publicationAdvances in financial economics
EditorsStephen P. Ferris, Kose John, Anil K. Makhija
Place of PublicationBingley
Number of pages22
ISBN (Print)9781780527888, 1780527888
Publication statusPublished - 1 Dec 2012
Externally publishedYes

Publication series

NameAdvances in Financial Economics
ISSN (Print)1569-3732


  • bondholders
  • default risk
  • R&D

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