Innovation quality of firms with the research and development tax credit

This paper examines innovation quality of U.S. research tax credit users (i.e., firms with currently earned research tax credits). Prior literature reports that the research tax credit is effective in increasing research and development (R&D) expenditures and reducing managers’ myopic behavior. However, little is known about the real (or economic) effect of R&D tax credits, as most of these findings have been based on estimated R&D tax credits rather than actual R&D tax credits. Additionally, some researchers and the government still have concerns about the real effect of R&D tax credits by criticizing the ambiguity and complexity of the tax codes (IRC Section 41). Therefore, I use actual R&D tax credits identified in firms’ 10-K and state R&D tax credits as identification tests to reduce endogeneity issues. My results indicate that research generating R&D tax credits contributes to better innovation quality and higher return volatility but lower pre-tax profitability. Overall, these findings imply that enacting the R&D tax credit provisions would trigger better innovation.     

Corporate taxation and the quality of research and development

This paper examines the impact of tax incentives on corporate research and development (R&D) activity. R&D tax incentives are commonly provided as special tax allowances or tax credits. In recent years, several countries also reduced their income tax rates on R&D output with the purpose to foster R&D activity. Previous papers have shown that all three tax instruments are effective in raising the quantity of R&D related activity. We in turn assess the impact of corporate tax incentives on the quality of R&D projects, i.e., their innovativeness and earnings potential. Using rich data on corporate patent applications to the European patent office, we find that a low tax rate on patent income raises the average profitability and innovation level of the projects undertaken in a country. The effect is statistically significant and economically relevant and prevails in a number of sensitivity checks. Generous R&D tax credits and tax allowances are in contrast found to exert a negative impact on project quality.     

Government R&D spending,fiscal instruments and corporate technological innovation

Using panel data from 242 cities in China, we examine the impact of government research and development (R&D) spending on corporate technological innovation. We find that listed firms located in cities with higher government R&D expenditures are more innovative than firms in other cities. Further, the positive effect of government R&D spending depends on fiscal instruments and factor allocation. Through subsidies and tax incentives, government R&D spending enhances firm innovation by alleviating financing constraints, improving employee creativity and ensuring efficient operations. We demonstrate that subsidies are more effective than taxes in spurring corporate technological innovation. We also show that the impact of government R&D spending is stronger for state-owned and high-tech enterprises than for other enterprises. Overall, our findings suggest that government R&D spending can substantially improve corporate technological innovation through fiscal instruments.     

Limits of tax regulation: Evidence from strategic R&D classification and the R&D tax credit

We investigate a tax avoidance strategy where firms use the ambiguity inherent in tax reporting to classify indirect costs as research and development (R&D) expenditures to take advantage of the R&D tax credit. We label this tax practice “strategic R&D classification”. We find a one standard deviation increase in strategic R&D classification leads, on average, to a 1.7% (1.5%) reduction in GAAP (cash) effective tax rates, suggesting this practice provides significant tax savings. However, we also find strategic R&D classification is related to both the level and changes in uncertain tax benefit liabilities required to be recognized under FIN 48, suggesting this practice comes with financial reporting costs. Our study contributes to the literature by documenting some of the costs and benefits associated with a previously unexplored tax strategy, and highlights the limitations faced by tax authorities in monitoring firms’ R&D tax credit.     

Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes

This paper evaluates the effect of tax incentives for research and development (R&D) on R&D spending and employment of R&D staff in a quasi-experimental setting. To do this, I exploit an exogenous reform in UK R&D tax policy, which changed the definition of an SME from firms with fewer than 250 employees to those with fewer than 500 employees. I use the UK Business Enterprise Research and Development Survey (BERD), for which companies do not have an incentive to relabel their ordinary employees or spending as R&D. I find that R&D tax incentives help to increase R&D spending at the company level; this translates to a user cost elasticity between ?0.88 and ?1.18. Further, the additional R&D generated through the tax relief can be attributed entirely to an increase in the number of R&D employees in the companies’ workforce. Together, these results challenge a common narrative on the role of R&D tax incentives.     

What is the After‐Tax Price of R&D? An Interstate Comparison*

As of 2005, 31 US states offered corporate income tax credits on research and development (R&D) expenses in order to encourage more in‐state innovation activities. Empirical questions about the efficacy of such tax breaks at the state level persist, in part because the complexity of the tax laws means that simple credit‐rate comparisons across states do not fully capture the differential variation in effective after‐tax price incentives firms face in choosing where to locate R&D activities. We are unaware of any research analysing and comparing the effective prices of R&D faced by firms, across all US states and utilising micro‐level data. Using data extracted from detailed reading of individual firms' 10‐K and S‐1 filings and of state‐level tax credit rules, we estimate the effective after‐tax price of basic and qualified research expenditure each firm would have faced in each of the 50 states had they been located there. Our methodology simulates the effective tax price of each firm's marginal dollar of research expenditure, assuming the firm chose to move all of its R&D operations to each of the 49 other states. Through Monte Carlo techniques, we consider the sensitivity of our interstate comparative results to several modelling assumptions. We find significant variation in after‐tax R&D prices across states with quite different R&D tax laws. Prices range from $0.176 to $0.520 on a marginal dollar of R&D in Virginia and Washington State, respectively. We also find that the interstate variability is generally more important – indeed, much wider than we had anticipated before investigating state‐by‐state regulations – than the inter‐firm variability within states.     

Governance or reputation? Flexible tax enforcement and excess goodwill: Evidence from the taxpaying credit rating system in China

This study investigates the effect of flexible tax enforcement on firms’ excess goodwill using unique manually collected data on taxpaying credit rating in China from 2014 to 2021. We document that A-rated taxpayer firms have less excess goodwill; A-rated firms reduce excess goodwill by 0.005 vis-a-vis non-A-rated firms, which accounts for 100% of the mean value of excess goodwill. This finding holds after multiple robustness tests and an endogeneity analysis. Moreover, this negative effect is more pronounced in firms with low information transparency, that are non-state-owned and that are located in regions with low tax enforcement intensity. The channel test results suggest that taxpaying credit rating system as flexible tax enforcement reduces firms’ excess goodwill through a reputation-based effect and not a governance-based effect. This study reveals that the taxpaying credit rating system in China as flexible tax enforcement can bring halo effect to A rating firms, thereby limiting irrational M&As and breaking goodwill bubble.     

Corporate responsibility towards employees and innovation: Evidence from an emerging market

Against a background of rising labor costs and the need to build a harmonious labor–capital relationship in China, this paper focuses on non-pecuniary incentives for employees and discusses the impact of corporate social responsibility (CSR) towards employees on innovation performance. The empirical results show that CSR towards employees significantly promotes corporate innovation, and that this effect remains robust after accounting for alternative proxies and endogeneity issues. In addition, the positive effect of CSR towards employees on innovation is more significant for firms in high-tech industries, with high levels of R&D inputs and high valuation of employee collaboration. Further analysis indicates that CSR towards employees does not promote R&D investment, but does significantly improve innovation efficiency and the marginal output of R&D investment and reduces the turnover rate of management-level staff with production and R&D backgrounds, which is conducive to stability of the innovation team. In addition, this paper also finds that for companies with high R&D expenditures, CSR towards employees significantly eases the sensitivity between executive turnover and performance, which helps executives resist pressure arising from a decline in short-term performance. The findings of this paper have implications for improving labor–capital relations and enhancing firm innovation capabilities.     

Board diversity and corporate propensity to R&D spending

Drawing on collective contributions and group performance perspectives, this paper examines the role of board diversity in firms' R&D investment decisions. Building on a fault-line argument about a team's demographic attributes, this study also decomposes the impact of demographic and cognitive diversity on R&D spending. The study sample contains UK data of non-financial companies covering the period between 2005 and 2018. We employ panel data analysis techniques and control for potential endogeneity issues through the application of the two-step system Generalised Method of Moments (GMM) estimations. The findings demonstrate a positive and significant relationship between board diversity and level of corporate R&D spending. The findings also show cognitive diversity as significantly positively associated with corporate R&D investments. Demographic diversity, however, has an insignificant relationship with corporate spending on R&D. The results further show that demographic diversity negatively moderates the relationship between cognitive diversity and spending on R&D. Our main findings document that the board's attributes as a group significantly influence decisions of strategic importance such as, investment in R&D projects. The findings on sub-dimensions of board diversity imply that as compared to demographic diversity, functional/cognitive diversity is more relevant to strategic decisions and related outcomes. The study has practical implications for shareholders in documenting the importance of board diversity, and policy implications for regulators in highlighting the separate roles of behavioural and cognitive diversity in shaping firms' strategic investment decisions.     

Cash flow uncertainty,financial constraints and R&D investment

Based on the data from Chinese listed companies of Shanghai and Shenzhen stock markets between 2005 and 2016, we systematically examine the relationship between cash flow uncertainty and R&D investment, and further research the moderating effect of financial constraints on the association between the two. Our empirical results find that R&D investment decisions tend to be more conservative and cautious due to cash flow uncertainty, which is not conducive to innovation efficiency. Firms with higher cash flow uncertainty invest more cautiously in R&D innovation, whereas firms with lower cash flow invest more boldly in R&D innovation. Financial friction may exacerbate the negative impact of cash flow uncertainty on innovation activities. Strategic cash holding can help firms better deal with the risks caused by cash flow uncertainty. In provinces with high marketization, the market competition intensifies, resulting in more significant cash flow uncertainty.     

How To Choose a Capital Structure: Navigating the Debt-Equity Decision

In corporate offices as well as the classroom, there continues to be significant debate about the costs and benefits of debt financing. There is also considerable variation in corporate credit ratings, even among companies as large and successful as those that make up the S&P 500. Many companies have been reassessing how they manage their balance sheet and their rating agency relationships; and with the market's generally favorable response to recapitalizations and dividend increases, such financing issues are likely to receive even more attention.
Underlying the diversity of corporate credit ratings is widespread disagreement about the "right" credit rating—a matter that is complicated by the fact that the cost of debt varies widely among companies with the same rating. Although credit ratings are clearly tied to measures of indebtedness such as leverage and coverage ratios, the most important factor in most industries is a company's size. For many mid-sized companies, an investment-grade rating can be attained only by making a large, equity-financed acquisition—or by making minimal use of debt. In this sense, the corporate choice of credit rating can be as much a strategic issue as a financial decision.
Maintaining the right amount of financial fl exibility is a key consideration when determining the right credit rating for a given company (although what management views as value-preserving flexibility may be viewed by the market as value-reducing financial "slack"). A BBB rating will accommodate considerably more leverage (30–60%) in companies with fairly stable cash flows and limited investment requirements than in more cyclical or growth-oriented companies (10–20%). When contemplating taking on more leverage, companies should examine all major operating risks and view their capital structure in the context of an enterprisewide risk management framework.     

Do major customers promote firms’ innovation?

This study examines whether and how a concentrated supply chain relationship affects a firm’s innovation decisions. Using data from Chinese listed firms in the manufacturing industry, we find that a concentrated customer base constrains a firm’s R&D investment, where a 1% increase in customer concentration is associated with a 0.011% decrease in R&D investment. To establish causality, we use the instrumental variable method, the reverse causality model, and the Granger causality test to re-examine the relationship and arrive at a consistent conclusion. Results from mechanism analysis suggest that a concentrated customer base constrains the internal fund availability and that the negative relationship between customer concentration and firms’ innovation is less pronounced for firms with more external financial support. Additional analysis reveals that the negative effect of customer concentration mainly affects R&D investment expenditure and that customer concentration also constrains innovation output in China. Overall, our paper reveals the dark side of close customer-supplier relationships and provides new insights into how supply chain relationships affect firms’ innovation decisions.     

Do ESG ratings promote corporate green innovation? A quasi-natural experiment based on SynTao Green Finance's ESG ratings

Corporate efforts in green technology improvements are critical for enhancing sustainability; consequently, how to promote green innovation has attracted scholarly attention. This study explores whether and how environment, social, and governance (ESG) ratings influence corporate green innovation by using an independent third-party rating agency's (SynTao Green Finance) ESG ratings in China as a quasi-natural experiment. We find companies covered by the ESG rating agency significantly increase green innovation output by 3.9%, mainly as an increase in green invention patents. ESG ratings' positive effects on green innovation are more pronounced for firms whose investors are less short-sighted, non-state-owned enterprises and firms with higher degree of financial constraints. Additionally, we find ESG ratings' impact can also increase the green innovation quality and synergetic green innovation. Thus, ESG ratings from third-party institutions can effectively increase corporate green innovation, which has important implications for companies to achieve green transformation and for emerging markets to improve ESG rating systems.     

Can foreign suppliers act as “innovation springboards” for firms? Evidence from China

This study provides a new approach for measuring supplier characteristics by distinguishing the countries where they are located. Using data of Chinese listed companies, we explore how firms' R&D investment and innovation efficiency (patents and citations) are affected by having foreign suppliers in their top five suppliers. Our findings suggest that foreign suppliers acting as transmitters of international technology increase firms' innovation efficiency based on organizational learning theory. Moreover, a series of uncertainties caused by foreign suppliers encourages firms to invest more in R&D based on strategic growth option theory. Mechanism tests show that foreign suppliers from countries with high innovation capacity and a similar Eastern culture have a greater impact on corporate innovation. Firms conduct more R&D activities to mitigate the uncertainties caused by foreign suppliers when they have insufficient overseas channels to acquire international knowledge and a high degree of dependence on foreign suppliers. These results are consistent with a series of robustness tests after accounting for endogeneity.     

Are credit ratings procyclical?

This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilizing annual data on all US firms rated by Standard & Poor’s, we find that ratings do not generally exhibit excess sensitivity to the business cycle. In addition, we document that previously reported findings of a secular tightening of ratings standards are not robust to a more complete accounting of systematic changes to measures of risk.     

信用评级变动能反映企业真实财务信息吗?——基于财务重述的视角

本文以2007-2018年拥有主体信用评级的A股上市公司为研究对象,利用企业财务错报在未来被重述这一场景,检验主体信用评级变动能否反映企业真实财务信息。研究发现,评级机构在发债企业财务错报年显著下调了主体信用评级,而在重述公告发布年没有上述现象,这表明主体信用评级下调反映了企业的真实财务信息。在控制内生性影响后,结论仍然成立。进一步研究发现,发债企业当期财务错报涉及盈余时,主体信用评级被下调的幅度更大,说明评级机构更加关注与盈余相关的财务信息。机制分析表明,评级机构维护自身声誉是主体信用评级变动能够反映企业真实财务信息的主要机制。此外,主体信用评级被下调还导致了资本市场投资者的负面反应。本文的研究结果为主体信用评级变动反映企业真实财务信息提供了直接的证据支持,揭示了主体信用评级的信息含量,也对理解中国情境下评级机构调整主体信用评级的行为动机提供参考。     

我国企业债券信用评级的因素分析——基于Altman的Z计分模型的实证研究

企业债券的信用评级是企业债券市场快速发展的基石.本文运用Altman的Z模型对我国发债企业的主体信用进行了评级,将其结果与现有企业债券评级结果相对照后,发现存在众多信用评级相背离现象,并对我国企业债券的信用评级提出了政策建议.     

Measuring the Cost‐Effectiveness of an R&D Tax Credit for the UK

This paper investigates the economic impact of the government's proposed new UK R&D tax credit. We measure the benefit of the credit by the effect on value added in the short and long runs. This is simulated from existing econometric estimates of the tax‐price elasticity of research and development (R&D) and the effect of R&D on productivity. For the latter, we allow R&D to have an effect on technology transfer (catching up with the technological frontier) as well as innovation (pushing the frontier forward). We then compare the increase in value added to the likely exchequer costs of the programme under a number of scenarios. In the long run, the increase in GDP far outweighs the costs of the tax credit. The short‐run effect is far smaller, with value added only exceeding cost if R&D grows at or below the rate of inflation.     

Green credit regulation,induced R&D and green productivity: Revisiting the Porter Hypothesis

This paper investigates the causal effect of green credit regulation policy on green productivity and revisits the Porter hypothesis. By separating R&D into environmentally induced R&D and production R&D, we find that green credit regulation policy significantly improves green total factor productivity (GTFP) growth rather than input-output TFP. We further show that environmentally induced R&D is the driver of GTFP, while production R&D significantly improves the input-output TFP. Finally, our estimations indicate that internal financing intermediation is used to finance environmental R&D projects due to the high cost of environmental innovation.     

Explaining dividend gap between R&D and non-R&D Indian companies in the post-reform period

Short-termism or market myopia hypothesis, which posits a negative trade-off between dividend payments and research and development (R&D) investments of corporate firms, forms the basis of our paper. Factors influencing the dividend gap between R&D and non-R&D companies in India are explored and a semi-parametric decomposition (developed by Dinardo, Fortin and Lemieux (DFL, 1996)) conducted on cross-section data of listed companies for the years 2001 and 2010 to investigate the issue. The results reveal that profitability and market to book ratio are the factors which have played some roles to reduce the dividend gap in 2001. However, in 2010, all the characteristics have some role to play. In other words, if the R& D companies enjoyed characteristics similar to the non-R&D ones, then dividend gap between the two groups would have been less. However, the results are found to be sensitive to the ordering of the variables in the weighting function. Refuting the short-termism theory, our findings corroborate that decisions regarding dividend payments and investment in R&D are made simultaneously, which is in agreement with the simultaneous dividend theory.