Dividends, Research and Development Expenditures, and the Value Relevance of Book Value for UK Loss-Making Firms
33 Pages Posted: 26 Mar 2012 Last revised: 26 Sep 2012
Date Written: September 17, 2012
We extend prior research on the value relevance of accounting information for loss-making firms by allowing the coefficient of book value to vary across three distinct set of loss-making firm observations in our valuation model. Our key findings are, first, that book value is a less important determinant of equity value for either high R&D-intensive firms or dividend-paying firms, relative to firms with low R&D-intensity and zero dividends. Prior literature suggests that book value is a strong indicator of firm value for loss-making firms. This reasoning stems from book value’s role as: (i) a proxy for the value of the possibility of abandoning or adapting the firms’ net assets; and/or (ii) a proxy for expected future normal earnings. Our work suggests that this prior literature does not fully capture the valuation role of book value for loss-making firms. Second, we also find that dividends are value relevant, but generally only when the valuation role of book value is contextualised by allowing its coefficient to vary across high R&D-intensive firms, and dividend-paying, loss-making firms.
Keywords: book value of equity, dividends, loss-making firms, research and development (R&D) expenditures, value relevance
JEL Classification: G12, M41
Suggested Citation: Suggested Citation