R&D and dividend payments as determinants of corporate value in the UK : Empirical evidence after controlling for endogeneity

Purpose – The purpose of this research is to expand on the available literature that suggests a positive effect of R&D activities and dividend payments on firms' value by considering three additional aspects that differ from previous research. Design/methodology/approach – The analysis of the valuation model is performed in a panel dataset of UK firms from 1994 to 2005 (8,559 observations). The methodology consists in applying General Method of Moments (GMM) to control for endogeneity, firm‐specific effects and time effects. Findings – The findings indicate that the use of GMM in the valuation model is adequate, given the statistical properties of the data. R&D stock is shown to be positively associated with corporate value, but its impact is lower than for R&D expenditure. Both special dividends and ordinary dividends are found to be positively associated with corporate value, supporting the signalling hypothesis which presupposes that managers might use dividends as a signal about companies' future profitability. Originality/value – This paper contributes to the empirical literature of corporate finance, not only with respect to the effect of special dividends and R&D stock on corporate value, as opposed to R&D expenditure and ordinary dividends (as in previous studies for the UK), but also in confirming that, after endogeneity has been controlled, there is a significant and positive effect of these variables but with a different impact.