| This study follows the pioneering work of Switzer (1984, 1985) in employing a simultaneous equation model to explore the interactions among a firm's new debt, dividend, capital expenditures, and R & D expenditures decisions. Using a data set that covers a longer period than Switzer's, the present author has estimated a model that incorporates recent theoretical work in financial theory not considered by Switzer.;Among the major conclusions of this study is that technological advances (as proxied by a firm's R & D expenditures) affect dividend policy positively and that dividend policy in turn exerts a positive influence on a firm's R & D expenditures. This finding lends empirical support to those who argue that the payment of dividends lowers agency costs and may provide a clue to answering the puzzling question of why firms pay dividends even though financial theory suggests it is not advantageous to do so. The same finding may also be consistent with the hypothesis that firms use dividend payments to signal good future prospects to outsiders.;Another important conclusion is that leverage both affects capital expenditures positively and is also positively affected by capital expenditures. When this result is combined with the positive impact of dividend policy on R & D investment, one can hardly accept the Modigliani and Miller (1958, 1961) hypothesis that investment decisions are not affected by financing decisions. These results contradict the results of Switzer's study, which has found some support for the Modigliani and Miller hypothesis. Instead, they confirm the findings of Dhrymes and Kurz (1967), McCabe (1979), and Peterson and Benesh (1983), all of whom have found evidence of interdependence between investment and financing decisions, although they did not include R & D expenditures in their simultaneous equation models. |
