CHANGES IN RESEARCH AND DEVELOPMENT DURING FINANCIAL DISTRESS: EMPIRICAL EVIDENCE FROM THE 2007–2008 FINANCIAL CRISIS

Abstract

We examine how changes in research and development expenditures (R&Ds) at the beginning of the 2008 financial crisis affected firms’ market performance immediately after the crisis. Our sample contains 2470 firms listed on NYSE and NASDAQ. We find that firms that increased their investment in R&Ds had higher risk-adjusted returns in 2009. The highest risk-adjusted returns were among firms that decreased dividends but increased their R&Ds and are associated with the firms’ managerial efforts before and during the crisis. These findings underscore the importance of investment in innovations even during severe cash constraints and document that firms benefit from preserving cash by cutting other than R&D expenses.