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

Abstract

ABSTRACTThis 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.