R&D and Dividend Payments as Determinants of Corporate Value in the UK : Empirical Evidence after Controlling for Endogeneity

The model in this paper uses UK data from 1994 to 2005 (8559 observations) with the aim 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. First, the model recognizes endogeneity problems which might arise when simple econometric techniques such as OLS and Within estimator are applied. In this respect, endogeneity, which originates from both simultaneous effects and shocks that affect more than one explanatory variable at the time, is controlled with instrumental variables by the application of GMM. Second, a measure of R&D stock is constructed for the analysis as opposed of using the R&D expenditure, as has been done in previous empirical research for the UK. Third, the impact of dividends paid on corporate value is measured with both the ordinary and ordinary plus special dividend payments. 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