Characteristics and Performance of R&D Tax Credit Users

• In Event: Performance, Legal, and Regulatory Issues

Abstract

This paper examines the firm characteristics and the R&D performance of the U.S. R&D tax credit users. Because the credit reduces tax expenses for the users (i.e., qualifying firms), it is effective in increasing R&D expenditures (Berger 1993; Klassen et al. 2004) and reducing managers’ myopic behavior (Brown and Krull 2008). Most of the evidence is based on the estimated R&D tax credits rather than the actual one. Instead, using firms that disclose their currently earned R&D tax credits in the footnotes, I investigate the following two questions.
The first analysis examines whether the likelihood of utilizing the credit varies with firm characteristics. The design of R&D tax credits and prior literature imply that firm characteristics related to research ability and tax status may be possible factors affecting the credit utilization. The next analysis examines whether the credit affects R&D performance. I measure three dimensions of R&D performance: innovation quality, profitability, and return volatility.
Overall, most results are consistent with my hypotheses. Firms with more research ability and tax-favored status are more likely to use R&D tax credits. Additionally, relative to non-qualifying firms’ R&D, qualifying firms’ excess qualified research contributes to better innovation quality and higher return volatility but not to differences in profitability. The findings are consistent with the purpose of the R&D tax credit provision.

Author

• Wei-Chuan Kao, Boston University