On the Trade-Off between the Future Benefits and Riskiness of R&D : A Bondholders' Perspective

Existing studies on the value-relevance of Ramp;D tend to overstate the Ramp;D benefits and shed little light on the trade-off between the Ramp;D benefits (mean effect) and their riskiness (variance effect). This study shows that the variance effect of Ramp;D is on average more significant than their mean effect in bond valuation. Hence, for creditors, the Ramp;D risk dominates their benefits. Furthermore, this study documents that Ramp;D measures alone explain approximately 80 percent of cross-sectional variations in bond ratings and risk premium. These findings contribute to the debate over Ramp;D accounting and the bond pricing literature