Find what can protect firms from bankruptcy

Intangible assets built with advertising and Research and Development can help protect firms from bankruptcy, says a study.

When the market is turbulent, a firm's R&D is more likely to help save it from bankruptcy. However, the effectiveness of each depends on the market climate.

"While it is widely recognised that intangible assets, such as brands and patents, contribute to a firm's stock price, until now there has been limited research on whether and how these same intangible assets protect firms from bankruptcy," said Niket Jindal of Indiana University's Kelley School of Business.

The study is based on data from more than 1,000 firms covering three decades. Bankruptcy prediction can be substantially improved by considering a distressed firm's brands and patents, in addition to the usual financial predictors, such as profit and leverage.

"What's particularly interesting is that the manner in which these intangible assets protect firms from bankruptcy differs from the manner in which they increase stock prices," said Leigh McAlister of the University of Texas's McCombs School of Business.

Whereas the stock prices are based on investors' expectations of the firm's performance over a long-term horizon, bankruptcy risk is based on the firm's ability to generate enough cash to survive in the near-term.

This is why brands protect firms from bankruptcy more when the market is stable than when the market is turbulent. In contrast, patents protect firms from bankruptcy more when the market is turbulent than when the market is stable.

The study appeared in the journal Marketing Science.