Creditor Rights and R&D Expenditures

Manuscript Type: Empirical Research Question/Issue: This study examines the impact of creditor rights on R& D intensity (R& D/total assets). We argue that managers in countries with strong creditor rights have more incentives to reduce cash flow risk and therefore limit expenditures on R& D more than managers located in countries with weak creditor rights. Research Findings/Insights: Using a sample of over 21,000 firms from 41 countries, our research is one of the first to document that strong creditor rights are indeed associated with reduced R& D intensity. This negative relationship is observed in market-based countries, but not in bank-based countries. Moreover, the results show that the negative effect of creditor rights on R& D intensity is usually stronger (more negative) for firms facing or near financial distress. We observe that the determinants for R& D intensity consist of both country and firm level variables and firm level variables appear to be more important in explaining the variance of R& D intensity. Theoretical/Academic Implications: This study documents an important link between creditor rights and R& D intensity. Our empirical procedure specifically accounts for the fact that R& D intensity and debt are likely to be jointly determined. Practitioner/Policy Implications: This research is important to policy makers interested in understanding the determinants of firms' R& D intensity. In particular, our study suggests a possible harmful effect of strong creditor rights, namely the possibility that R& D intensity will be lowered.