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

Wei Jiang

Manchester Business School

Andrew W. Stark

University of Manchester - Manchester Business School

Date Written: September 17, 2012

Abstract

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

Jiang, Wei and Stark, Andrew W., Dividends, Research and Development Expenditures, and the Value Relevance of Book Value for UK Loss-Making Firms (September 17, 2012). British Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1734287 or http://dx.doi.org/10.2139/ssrn.1734287

Wei Jiang (Contact Author)

Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Andrew W. Stark

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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