Evaluation of Financial Distress Costs in Innovative Companies

During the last decades investments in research and development (R&D) projects rose significantly. Many experts found positive relation between R&D expenses and a company’s value. However investments in innovations are characterized by high level of uncertainty and returns in a long period of time. These factors increase financial distress probability of firms considerably. Thus the aim of the present paper is to evaluate financial distress costs in companies that invest in research and development projects. The study covers 389 innovative firms during the period from 2006 to 2015. The analysis is based on direct and indirect costs evaluation. First ones are estimated through panel logistic regression. Indirect ones are calculated as unexpected losses or profits relative to industry indicators. The investigation demonstrates that there is strong relation between R&D expenses and financial distress. The results of the research show that total financial distress costs of innovative companies amount 7.95% of total assets, or 11.78% of value of a company on average.