R&amp;D investments and high-tech firms' stock return volatility

Gharbi, Sami; Sahut, Jean‐Michel; Teulon, Frédèric

doi:10.1016/j.techfore.2013.10.006

Cited by 65 publications

(34 citation statements)

References 70 publications

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“…In the event of project failure, alternative fields for the use of R&D expenditures are scarce (Kothari, Laguerre, & Leone, ). Compared with capital expenditures, R&D investments are, therefore, more significantly associated with future earnings variability (Kothari et al., ), and stock returns volatility (Chan et al., ; Gharbi, Sahut, & Teulon, ). These issues identified in prior research indicate that debate about the accounting treatment of R&D investments focuses on the associated future benefits and risks together with how to account for the trade‐off.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Development costs capitalization and debt financing

Kreß

Eierle

Tsalavoutas

2019

Business Fin & Account

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This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non-financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms' motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub-sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device.Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Development costs capitalization and debt financing

Kreß

Eierle

Tsalavoutas

2019

Business Fin & Account

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“…Gharbi et al. () find a strong positive relationship between R&D and stock return volatility for French high‐tech firms, suggesting that investors are uncertain about R&D prospects. Lev () argues that the prospect of total loss is common in many innovative activities, but rare for physical and financial assets.…”

Section: Literature Reviewmentioning

confidence: 99%

Does the Riskiness of R&D Outweigh Its Benefits? The Perspective of US Private Lenders

Ciftci¹,

Darrough²

2016

Business Fin & Account

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We investigate the relationship between R&D investments and loan spread. Prior research documents that R&D is associated with greater future benefits and risks, suggesting that the valuation of R&D depends on a tradeoff between the two. Some research finds that bondholders consider that the benefits of R&D outweigh its risks: R&D is negatively associated with bond yields. This is surprising given that debt holders are more concerned about downside risk due to asymmetric payoffs. Using data on private debt from the US, we find an overall positive association between loan spread and R&D intensity, suggesting that the riskiness of R&D appears to outweigh its benefits for private lenders. Furthermore, an asymmetric payoff structure implies that the risks of R&D for lenders increase with default risk. Consistent with this argument, we find a positive association between R&D and loan spread for firms that are smaller, with high default‐risk ratings, unrated (no public debt), or in industries with weaker legal protection. Unrated firms are in the most R&D‐intensive group and make up nearly 60% of the firms with private debt. Consequently, studies that exclude unrated firms are likely to present an incomplete picture of the perspective of debt holders on R&D.

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“…Event studies that measure the market response to announcement of new debt or share issue (considered good news) show that there are higher abnormal returns to firm shares when the firm is more R&D-intensive (Zantout, 1997;Alam and Walton, 1995). In addition, Gharbi et al (2014) highlight, using French high-tech firms, that stock returns are more volatile for more R&D-intensive firms because the information asymmetry generated by innovation makes prospects more uncertain. Aboody and Lev (2000) show that insider gains are larger at R&D intensive firms than firms without R&D because that is where asymmetric information is higher.…”

Section: Government Policies Consideredmentioning

confidence: 99%

Optimal Taxation and R&D Policies

Akcigit¹,

Hanley²,

Stantcheva³

2016

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We study the optimal design of corporate taxation and R&D policies as a dynamic mechanism design problem with spillovers. Firms are heterogeneous in their research productivity, i.e., in the efficiency with which they convert a given set of R&D inputs into successful innovations and that research productivity is private information. There are non-internalized technological spillovers across firms, but the asymmetric information prevents correcting them in the first best way. We highlight that key parameters for the optimal policies are i) the relative complementarities between observable R&D investments, unobservable R&D inputs, and firm research productivity, ii) the dispersion and persistence of firms' research productivities, and iii) the magnitude of technological spillovers across firms. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. In the data, high research productivity firms get disproportionately higher returns to R&D investments than lower productivity firms. Very simple innovation policies, such as linear corporate taxes combined with a nonlinear R&D subsidy-that provides lower marginal subsidies at higher R&D levels-can do almost as well as the full unrestricted optimal policies. Our formulas and theoretical and numerical methods are more broadly applicable to the provision of firm incentives in dynamic settings with asymmetric information and spillovers and to firm taxation more generally.

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R&D investments and high-tech firms' stock return volatility

Cited by 65 publications

References 70 publications

Development costs capitalization and debt financing

Development costs capitalization and debt financing

Does the Riskiness of R&D Outweigh Its Benefits? The Perspective of US Private Lenders

Optimal Taxation and R&D Policies

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