R&D Investment and Pre-Committed Payouts: An Empirical Analysis Using the R&D Investment-Incentivizing Tax Reform as a Natural Experiment

Abstract

This paper examines the pre-committed payout hypothesis that firms which increase R&D investment also increase payouts in order to mitigate the information asymmetry and agency problems. We use the R&D tax reform which came into effect in 2007 in Japan as a natural experiment. We find that increases in R&D investments lead to increased payouts, as predicted by the pre-committed payout hypothesis. Furthermore, we find that the positive relationship between R&D investment and payouts is affected by the degree of corporate governance and agency problems measured by managerial ownership, the status of net debt and the adoption of anti-takeover provisions.

Keywords: Pre-commitment, R&D Investment, Payout Policies, Agency Problems, Difference-in-Differences

JEL Classification: G3, G35