found in the dividend equation. R&D was often negatively associated with
dividends, but the relationship was not statistically significant. The petro-
leum industry had a very unstable dividend policy (the industry dummy
variable was usually significant, whether positive or negative).
While external funds (EF) are normally issued in response to in-
creasing investments, the hypothesized (positive) relationships among
new debt, dividends, and research and development were not found. The
relationship found between new debt and investment was consistent
with the perfect markets hypothesis. New debt financing was negatively
associated with cash flow. Furthermore, debt-to-equity ratio coefficients
were (unexpectedly) positive. One would expect that as cash flow in-
creased, there would be less need to issue capital. In addition, a higher
debt-to-equity ratio would raise the risk to the firm’s creditors and nor-
mally reduce future capital issues. The rubber, machinery, chemical, and
drug industries tended to be new debt issues intensive. Support for the
imperfect markets hypothesis was indicated by the positive interdepen-
dencies of new debt issues and investments (contrary to the perfect mar-
kets hypothesis). Moreover, the alternative uses of funds concept was
found in the significant negative interdependencies between R&D ex-
penditures and dividends. Furthermore, R&D expenditures and invest-
ment decisions were interrelated.
In a follow-up study by Guerard, Bean, and McCabe (1986), the
price of common stock (PCS) was positively affected by dividends, invest-
ment, R&D, and the book value of common stock, in agreement with
Ben-Zion (1984), who studied the relationship between R&D and the
firm’s market value for 157 firms during the 1969–1977 period. How-
ever, patents issued to a firm did not appear to increase the value of the
firm’s equity (only in 1982), as was found by Ben-Zion. Lagged patents
were positively associated with the stock price in most years. The signifi-
cance levels for the dividend, capital expenditures, and R&D variables
tended to decline in the latter years of the study (1980–1982). The firm’s
measure of systematic risk (its beta) is incorrectly positive in the esti-
mated stock price equation. A positive coefficient was also found by Ben-
Zion (1984). It is noteworthy that the book value of equity variable
dominates the stock price equation, as Ben-Zion found, except for 1981.^2
Common stock in the machinery industry appeared to be overpriced rela-
tive to that of other industries.
These findings cast additional doubt on the perfect markets hypoth-
esis. They also suggest that R&D expenditures (but not necessarily
patents) are among the variables that influence the stock market value of
a firm.
backadmin
(backadmin)
#1