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A Test of the Debt‐Monitoring Hypothesis: The Case of Corporate R&D Expenditures
Author(s) -
Zantout Zaher Z.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00413.x
Subject(s) - capital structure , shareholder , debt , monetary economics , economics , stock (firearms) , debt ratio , capital expenditure , test (biology) , financial economics , econometrics , finance , corporate governance , biology , mechanical engineering , paleontology , engineering
Studies that test for shareholder wealth effects of announcements of plans to increase R&D expenditures find an average positive effect, but also a significant cross‐sectional variation. This study determines whether the effect can be predicted when the announcing firm's capital structure is considered. Results suggest a positive relation between the debt ratio and the R&D induced abnormal stock returns. These results are robust using different industry‐adjusted and unadjusted measures of capital structure and while controlling for several potentially influential variables. In addition, the gains to shareholders do not seem to be wealth transfers from bondholders. This evidence provides support to the debt‐monitoring hypothesis.