financial differences. Our econometric estimations of the R&D, capital
expenditures, dividends, new debt, and stock price decisions use only
contemporaneous variables because the use of distributed lags of the in-
vestment, dividend, and R&D variables did not enhance the regression
models. Higgins (1972) and McCabe (1979) previously employed mod-
els in which composite investments and dividend variables used three-to-
four-year weights with lagged variables having weights of 0.65, 0.35,
and 0.10 for one-, two-, and three-year lags.
The three-stage least squares regression estimates indicated that R&D
expenditures were positively associated with the previous year’s R&D ex-
penditures and (current) net income. Dividends were an alternative use to
R&D funds in most years, whereas investments were most often positively
associated with increasing R&D activities. The lack of statistically signifi-
cant relationships among R&D, depreciation, and external funds was quite
surprising; only the dividend variable significantly violated the perfect mar-
kets hypothesis in the R&D activities equation. The electronics industry
tended to spend more on R&D activities, holding everything else constant,
than other industries.
The three-stage least squares estimate of the investment (CE) equa-
tion indicated that the dividend variable was generally positive in the in-
vestment equation (contrary to the imperfect markets hypothesis). The
statistically significant positive coefficient of the new debt variable in the
investment equation complemented the work of McCabe (1979), Peter-
son and Benesh (1983), and Guerard and McCabe (1992). Similarly,
Dhrymes and Kurz (1967) did not always find a significant positive asso-
ciation between new debt and investments. R&D expenditures were pos-
itive in the investment equation; Mueller (1967) found an inverse
relationship between investments and R&D in his earlier work, and no
relationship between the variables in his later work with Grabowski
(Grabowski and Mueller 1972). Decreases in net liquidity were associ-
ated with rising investment. Cash flow positively affected investment,
while the tax rate had statistically significant negative coefficients in
1976 and 1977 in the investment equation. The positive coefficients on
the R&D and dividend variables were counter to the imperfect markets
hypothesis.
Dividends (DIV) were positively associated with rising net income and
previous dividends, supporting the positions of Lintner (1956) and Fama
and Babiak (1968). There was a slight tendency for rising investment to ac-
company increasing dividends. The hypothesized (negative) relationship
between investments and dividends was never realized in the dividend
equation estimates. Little support for the imperfect markets hypothesis was
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