Keywords

signaling, innovation, initial public offerings (IPOs), research and development (R&D) tax credit, nontax benefits, underpricing, proceeds

Abstract

Using the IPO setting, we test whether firms signal the quality of their investments in innovation activities by claiming R&D tax credits. We find the presence and amount of the R&D credit are each associated with lower information asymmetry and with higher investor demand at IPO. Conservatively, we estimate that sample firms realize additional IPO proceeds of 32–45 percent of their creditable R&D expenditures, indicating economically significant non-tax benefits associated with the R&D credit. We verify the R&D credit signal by showing its positive association with firms’ future patenting activity, patent citations, and post-IPO stock returns. Results from these tests are concentrated among firms limited in their ability to obtain tax benefits from R&D credits, consistent with the R&D credit providing nontax benefits as a signal of innovation investment quality.

Original Publication Citation

Hepfer, B.F., H.W. Judd, and S.C. Rice. 2024. “Signaling Innovation: The Nontax Benefits of Claiming R&D Tax Credits,” Journal of Accounting & Economics.