R&D investment and distress risk

• In a broad sample, R&D expenditures are positively correlated with the risk of delisting due to bad performance.
• This baseline result is stronger for financially constrained firms.
• The baseline result is stronger during economic downturns.
• The baseline result is weaker among firm with a track record of successful R&D.
• The baseline result is weaker among firms with greater analyst coverage.

This paper proposes that besides volatility, R&D can increase firms' distress risk through another channel. Unlike capital investment, R&D is more inflexible and subject to high adjustment costs. Moreover, R&D intensive firms face severe financial constraints and are more likely to suspend/discontinue R&D projects. Therefore, firms' distress risk increases with their R&D intensity. Using a large panel of US companies over the 1980 to 2011 period, I find a robust empirical relation between R&D and distress risk, primarily among financially constrained firms. Moreover, the effect of R&D on distress risk is magnified during economic downturns. I also find that firms that have been previously successful in R&D or firms with high analyst coverage can mitigate the relationship between R&D and distress risk.