July 31, 2020 - Podcast

Episode 14: Partnerships with bankrupt companies could be double-edged sword for investors - Plus, IU president says the U.S. should not stop investing in scientific research

The list of companies that have filed for bankruptcy during the first half of 2020 reads like a “who’s who” of major retailers and recognized brands. But the carnage also includes tech firms previously seen to have much potential. With the recent rise in bankruptcies, suppliers and partners of these bankrupt companies are being forced to make a difficult decision. Should they bet on the bankrupt customer or partner to survive and keep investing, or should they cut their ties to minimize losses? New research from Niket Jindal of the Indiana University Kelley School of Business found that when companies are in bankruptcy, investments in advertising and in research and development increase the odds of surviving for some and decrease the odds for others. The study looked at companies’ past investments in advertising and R&D and whether they can help suppliers make a decision on whether to bet on the bankrupt company. Looking at 1,672 bankruptcy cases filed in U.S. bankruptcy courts from 1996 to 2019, Jindal found that managers can increase the accuracy of predicting whether a bankrupt company will survive by 11 percent by considering its advertising and research and development investments, in addition to the usual financial predictors. Specifically, the results show that a bankrupt company’s advertising increases the odds the company will survive when at least 38 percent of the company’s debt has been borrowed from suppliers. For research and development, the cutoff point is when at least 21 percent of the company’s debt has been borrowed from suppliers. Jindal said suppliers and partners should be very careful when including a bankrupt firm’s advertising and research and development investments in their decision-making process. The key, he said, is to look at the portion of the bankrupt company’s debt that is due to suppliers versus banks because this shows the influence that the bankrupt company’s suppliers will have, relative to other creditors, in the bankruptcy process.

In other news, as the coronavirus continues to rage in the U.S., policy makers, health care services and the public have turned to science, technology and research for answers and ways to cope with the pandemic. For decades, most Americans have taken the U.S. lead in science and technology more or less for granted. But Michael McRobbie, president of Indiana University, says that lead was not inevitable, and it did not develop by chance. The path to America’s long-standing national strength in science and technology was first laid out in the report titled “Science: The Endless Frontier,” published 75 years ago, right after World War II. In the report, Vannevar Bush, who headed federal research during the war while on leave from MIT, proposed that the path to future wealth and well-being was for the federal government to build on the success of its wartime investments in science by financing basic research in university labs. The White House and Congress accepted the report’s logic and vision. They created the National Science Foundation — and ultimately built a research system that has helped power U.S. innovation. McRobbie says the question now is: is this system capable of meeting the intense triple challenge of the moment — bolder foreign competitors, faster technological change and a merciless race from lab to market? There is deep concern that the answer to that question is no, he says. The U.S. has the fundamental building blocks for success, including many of the world’s top research universities that are at the forefront of the fight against COVID-19. But without a major, sustained funding commitment, a focus on key technologies and a faster system for transforming discoveries into new businesses, products and quality jobs, America will not prevail. Today’s leaders have the opportunity to display the farsighted vision their predecessors showed after World War II — to expand and shape our institutions, and to make the investments to adapt to our rapidly changing world.