Taxes, Dividends and Firms’ Investments in Research and Development

The paper analyses the determinants of dividend payments and tests the hypothesis that companies pay dividends at the expense of investing in research and development (R&D). The evidence suggests that four fundamental factors – size, growth, profitability and risk – determine the decision to pay dividends but also to invest in R&D. Consistent with previous evidence, the average R&D intensity of dividend paying companies is lower than the rest of other companies. However, the relatively small number of cash constrained companies that have never paid dividends drives these results. There is no strong evidence that by increasing (decreasing) dividends companies decrease (increase) their R&D investments and the recent abolition of the dividend tax credit, aimed at decreasing dividends and stimulating investments in R&D is not found to be effective. The results are entirely consistent with the separation theorem developed by Miller and Modigliani (1961). JEL Classification: G35, G18, G31