Corporate Innovation and Bond Pricing

• In Event: Use of Accounting in Debt

Abstract

We propose firm-level innovation performance to be an important determinant of corporate creditworthiness and investigate this relation from the perspective of bond investors. Specifically, we use a firm’s publicly available patent records to measure its innovation performance in terms of quantity, quality, generality, and originality. We find that bonds issued by more innovative firms have lower issuance premiums and lower realized excess returns because investors perceive these firms to have lower default probabilities. Our identification is strengthened with tests based on exogenous shocks from state-level R&D tax credits and instrumental variables including monetary and time costs of innovation activities.

Authors

• Po-Hsuan Hsu, The University of Hong Kong

• Hsiao-Hui Lee, The University of Hong Kong

• Zhu Liu, SUNY - Albany

• Zhipeng Zhang, BlackRock, Inc