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

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.

Original languageEnglish
Title of host publicationAdvances in financial economics
EditorsStephen P. Ferris, Kose John, Anil K. Makhija
Place of PublicationBingley
PublisherEmerald
Pages127-148
Number of pages22
ISBN (Print)9781780527888, 1780527888
DOIs
Publication statusPublished - 1 Dec 2012
Externally publishedYes

Publication series

NameAdvances in Financial Economics
Volume15
ISSN (Print)1569-3732

Keywords

  • bondholders
  • default risk
  • R&D

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