Measuring distress risk: The effect of R and D intensity

Research output: Contribution to journalArticle

41 Citations (Scopus)

Abstract

Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book-to-market firms. The results hold after updating stale parameters and under various tax assumptions. Our evidence raises concerns about interpretation of extant literature that relies on accounting measures of distress.

Original languageEnglish (US)
Pages (from-to)2931-2967
Number of pages37
JournalJournal of Finance
Volume62
Issue number6
DOIs
StatePublished - Dec 1 2007

Fingerprint

Distress
Financial distress
Tax
Conservative accounting
Book-to-market

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

@article{9fd5e797984947ddbcc7944733a64049,
title = "Measuring distress risk: The effect of R and D intensity",
abstract = "Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book-to-market firms. The results hold after updating stale parameters and under various tax assumptions. Our evidence raises concerns about interpretation of extant literature that relies on accounting measures of distress.",
author = "Franzen, {Laurel A.} and Cornaggia, {Kimberly J.} and Simin, {Timothy T.}",
year = "2007",
month = "12",
day = "1",
doi = "10.1111/j.1540-6261.2007.01297.x",
language = "English (US)",
volume = "62",
pages = "2931--2967",
journal = "Journal of Finance",
issn = "0022-1082",
publisher = "Wiley-Blackwell",
number = "6",

}

Measuring distress risk : The effect of R and D intensity. / Franzen, Laurel A.; Cornaggia, Kimberly J.; Simin, Timothy T.

In: Journal of Finance, Vol. 62, No. 6, 01.12.2007, p. 2931-2967.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Measuring distress risk

T2 - The effect of R and D intensity

AU - Franzen, Laurel A.

AU - Cornaggia, Kimberly J.

AU - Simin, Timothy T.

PY - 2007/12/1

Y1 - 2007/12/1

N2 - Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book-to-market firms. The results hold after updating stale parameters and under various tax assumptions. Our evidence raises concerns about interpretation of extant literature that relies on accounting measures of distress.

AB - Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book-to-market firms. The results hold after updating stale parameters and under various tax assumptions. Our evidence raises concerns about interpretation of extant literature that relies on accounting measures of distress.

UR - http://www.scopus.com/inward/record.url?scp=36649009777&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=36649009777&partnerID=8YFLogxK

U2 - 10.1111/j.1540-6261.2007.01297.x

DO - 10.1111/j.1540-6261.2007.01297.x

M3 - Article

AN - SCOPUS:36649009777

VL - 62

SP - 2931

EP - 2967

JO - Journal of Finance

JF - Journal of Finance

SN - 0022-1082

IS - 6

ER -