R&D capability implies a firm's underlying economic performance, which is an important determinant for customers to ensure the suppliers’ quality. Suppliers can signal the market as to their R&D capabilities by capitalizing their R&D expenditures. In this study, we aim to examine the effect of supplier firms’ R&D capitalization on customer-supplier relationships from two perspectives: trade credit and relationship continuity. Using a sample of U.S. software firms from 2001 to 2012, we document a negative relationship between a supplier’s R&D capitalization and the provision of trade credit to customers. We also use a duration analysis to investigate the association between R&D capitalization and customer-supplier relationship continuity, and find that an increase in capitalized R&D is associated with longer relationships. These results suggest that suppliers who capitalize R&D expenditures are perceived by customers as having higher innovation capabilities and thereby given higher bargaining power, which induces customers to settle accounts payable more quickly and to be more willing to continue the business relationship.
