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Non-technical SummaryDue to outcome uncertainty of R&D investments, it is a-priori unclear whether innovative activity leads to improved firm performance. The market value model represents a possibility to measure the returns to innovation by relating the valuation of firms at the stock market to R&D investment. The market value model has the advantage of bundling information and expectations concerning future firm values. It has the disadvantage that only a minority of companies can be used for this empirical test, as only a small share of firms in the business sector universe are publicly traded at stock markets.As a complement to the market value approach, we propose the use of credit ratings which are available for almost every company. Credit ratings are not only based on current but also on future profits, as in many cases borrowers and other remittees have long-run connections to a firm in question. In addition, we use the future payment behavior as a variable describing default risk. Payment behavior is classified according to the average duration until payments are actually conducted. This variable ranges from "payments always being in time" to the worst possible scenario, which is bankruptcy.The major purpose of this study is a comparison of R&D in Western and Eastern German firms with respect to its relationship to our proxy variables for financial returns. It turns out that investing in R&D is good for Western German firms and bad for East-German firms.While R&D contributes positively to future ratings in the West, the opposite is true in the East. Apparently the effect of risk when investing in R&D outweighs the potential benefits. If the receipt of subsidies is taken into account, R&D still influences ratings positively in the West. In Eastern Germany, R&D is at least not negatively affecting the credit rating, when firms obtain public money for such investments.As a further step, we analyze future financial distress in order to test whether Eastern German companies are simply discriminated by the rating agency, or if they indeed face higher risk of bankcruptcy or defaults when engaging in R&D. The results show that Eastern German firms seem to have significantly more difficulties to translate R&D into viable products or costreducing processes. If R&D is conducted, they suffer higher likelihood of future financial distress and finally bankruptcy. In the case of subsidized R&D, we do not witness this negative...
