The Effect of Investing R&Ds on the Firm's Financial Performance Under Financial Distress: High-Tech vs. Low-Tech Firms

Abstract

This paper examines the effect of investing R&Ds on the firm’s financial performance under financial distress. A trade-off exists between the firm’s short-term financial difficulty and long-term growth. The financial performance is simultaneously influenced by the benefits from R&D investments and the liquidity constraints for financing R&D investments. We collect a sample of 606,534 quarterly observations where total assets and sales are positive between 1981 and 2005 from the quarterly COMPUSTAT database. To define whether or not a firm is experiencing financial distress, we use the Ohlson’s model (1980) which implements a logistic regression to measure the financial distress of public firms. The empirical results show that the financial distress risk of the high-tech industry is relatively less aggravated by maintaining high cumulative R&D investments. The low-tech firms may rather improve their financial performance by decreasing their R&D expenditures under the high financial distress risk state.