Measuring distress risk: The effect of R and D intensity

Research output: Contribution to journalArticle

42 Scopus citations

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
Publication statusPublished - Dec 1 2007

    Fingerprint

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this