| Article ID: | iaor2009774 |
| Country: | United Kingdom |
| Volume: | 62 |
| Issue: | 6 |
| Start Page Number: | 2931 |
| End Page Number: | 2967 |
| Publication Date: | Dec 2007 |
| Journal: | Journal of Finance |
| Authors: | Franzen Laurel A., Rodgers Kimberly J., Simin Timothy T. |
| Keywords: | research, risk, measurement |
Because of upward trends in research and development activity, accounting measures of financial distress have become less accurate. We document that (1) higher research and development spending increases the likelihood of misclassifying solvent firms, (2) adjusting for conservative accounting of research and development increases the number of correctly identified distressed firms, and (3) adjusted measures of distress alleviate previously documented anomalously low returns of large, high distress risk, low book-to-market firms. The results hold after updating stale parameters and under various tax assumptions.