Corporate Innovation, Default Risk, and Bond Pricing

47 Pages Posted: 20 Mar 2012 Last revised: 16 Sep 2017

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Hsiao-Hui Lee

National Chengchi University (NCCU) - Department of Management Information Systems

Alfred Z. Liu

University at Albany, SUNY

Zhipeng Zhang

Blackstone Group LLC

Date Written: October 17, 2014

Abstract

Prior literature documents mixed evidence about how research and development activities affect corporate creditworthiness. We investigate whether publicly available patent information is incrementally useful in assessing the benefits and risks of corporate innovation from bondholders’ perspective. We find that firm-level innovation performance — measured in terms of the level, impact, generality, and originality of firms’ patents — is a determinant of bond issuers’ perceived default risk and, by extension, corporate bond pricing. Investors consider more technologically innovative bond issuers to have lower default probabilities; consequently, bonds issued by more innovative firms have lower issuance premiums and lower realized excess returns. Our findings are further supported by instrumental regressions that use the monetary and time costs of innovation, and by cross-sectional tests based on exogenous shocks from state-level R&D tax credits.

Keywords: Innovation, patent, default risk, bond premium, bond return

JEL Classification: G12, O32

Suggested Citation

Hsu, Po-Hsuan and Lee, Hsiao-Hui and Liu, Alfred and Zhang, Zhipeng, Corporate Innovation, Default Risk, and Bond Pricing (October 17, 2014). Journal of Corporate Finance, Volume 35, December 2015, Pages 329-344, Available at SSRN: https://ssrn.com/abstract=2024776 or http://dx.doi.org/10.2139/ssrn.2024776

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Hsiao-Hui Lee (Contact Author)

National Chengchi University (NCCU) - Department of Management Information Systems ( email )

No. 64, Section 2, Zhǐnán Rd
Wenshan District
Taipei City
Taiwan

Alfred Liu

University at Albany, SUNY ( email )

Albany, NY 12222
United States

Zhipeng Zhang

Blackstone Group LLC ( email )

345 Park Ave
New York, NY 10154
United States
(212) 390-2449 (Phone)
(646) 253-8757 (Fax)

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