Corporate innovative efficiency: Evidence of effects on credit ratings

This study shows that corporate innovation efficiency (IE) as measured by patents filed or cited divided by R&D expenditures improves credit ratings, but this occurs gradually. This gradual response implies that credit rating agencies (CRAs) impose in the near term a higher borrowing cost on innovative firms than their performance and risk characteristics would justify. We predict and confirm that the gradual improvement of credit ratings in response to IE is amplified for firms with more downside risk, with more financial constraints, and with increased sales or cash flows in the years following the IE. These results suggest a predictable response of CRAs to contemporaneous IE information based on economic factors relevant to credit analysis rather than a response based on CRAs' inefficient or biased use of innovation information.