The dividend payout policy and R&D for loss firms: evidence from South Korea

Abstract

This paper examines the effect of research and development (R&D) on dividend payments for loss firms. Even though a firm's positive earnings is the main factor of dividend payout policy, earnings is not the main factor for loss firms' dividend policy. An increase in dividends affects a firm's liquidity and may cause a loss of profitable investment opportunities, thus paying dividends when a firm has negative earnings can be quite costly. Given the increase of loss firms with dividend payouts in Korea, this paper explores whether R&D is crucial for paying dividends among loss firms. We expect that loss firms with high R&D intensity are more likely to pay dividends to signal their future prospects. Using the sample from South Korean firms over 2002-2013, we find evidence that is consistent with our prediction. It suggests that loss firms with good prospects have incentives to signal their future performance using dividend payouts, and R&D is an important factor in determining dividend payout for loss firms.