The Effects of R&D Expenditures on Bondholders

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.

Citation

Jiang, Z., Kim, K.A. and Hsin-Han Shen, C. (2012), "The Effects of R&D Expenditures on Bondholders", Ferris, S.P., John, K. and Makhija, A.K. (Ed.) Advances in Financial Economics (Advances in Financial Economics, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 127-148. https://doi.org/10.1108/S1569-3732(2012)0000015007