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.