Essays in corporate finance: supply chain relationship, stock market liquidity, corporate innovation and dividend policy

Innovation and dividends are critical determinants of a firm's value and an investor's welfare. Successful innovation is known to be a main driver of a nation's long-term economic growth and a firm's competitive advantage. Pursuing innovation necessary involves trade-offs. One of these trade-offs can be the level and frequency of dividend payouts. Dividend payouts can be a major source of a shareholder's income and hence are a key input into the decision on whether to invest in a particular stock. Understanding the drivers of innovation expenditure and dividend payments as well as their mutual association is essential for managers, investors, and regulators of the decision-making process. The aim of this thesis is to examine the determinants of innovation and dividends. In particular, this thesis investigates three main research issues. First, it studies the impact of customer innovation on supplier innovation. Next, it analyses the effect of customer relationship duration on supplier dividend payouts and whether this association is affected by supplier innovation investment. Last, this thesis analyses the influence of stock market liquidity on dividend policy and tests whether stock market liquidity and dividends association are influenced by firm innovations. The findings and associated contributions of this thesis are reported through three empirical chapters as summarised below. The first empirical chapter, Chapter 2, focuses on how customer innovation impacts supplier innovation. This chapter utilises an extensive sample of stakeholders, in particular the customer-supplier relationship covering firms in all industries in the U.S. market. It also employs patent information, such as patent counts and patent citations, as measures of innovation. The findings show that customer innovation positively and significantly influences supplier innovation. These results are robust across different subsamples and are further confirmed by a falsification test. This chapter further documents that the impact of customer innovation on firm's innovation is stronger for suppliers with greater investment in research and development (R&D) activities. This implies that R&D investment enhances a firm's ability to absorb external innovative ideas. This study, however, finds that the impact of customer innovation on firm innovation does not vary with firm industry competition. These findings extend the literature on the role of external innovation on firm innovation by showing the spillovers effects of customer innovation on supplier innovation activities. These findings further complement the literature on the role of absorptive capacity. Previous studies show that greater investment in R&D activities enhance firm capacity to absorb technology from market competitors. This chapter shows that firm's absorptive capacity is also important for technology spillovers from customers. The second empirical chapter, Chapter 3, investigates the impact of relationship duration with major customers on firm dividend payout. The findings show that the longer the relationship with major customers, the higher the firms¿ dividend payouts. The results are robust across different model specifications controlling for industry and year fixed effects, and different estimation methods, including pooled OLS and Tobit regressions. The positive impact of relationship duration on dividend is mainly driven through three channels. First, relationship duration reduces adverse effects of financial distress caused by relationship specific investment on dividends. Second, it helps to reduce the level of firm cash flow uncertainty. Third, relationship duration improves dividend payouts by enhancing knowledge spillovers from customers. The main contribution of Chapter 3 is through the analysis of the impact of relationship duration with major customers on corporate dividend payouts. In contrast with previous literature documenting that relationship with major customers reduces firms¿ dividend payouts, this chapter shows that if the relationship persists in the long term, it will increase dividend payouts. The third empirical chapter, Chapter 4, investigates the impact of stock market liquidity on dividend policy and the moderating roles of the imputation tax regime and innovation investment on liquidity-dividend relationships. The analysis is conducted in the Australian market, where there are two tax systems operating contemporaneously. The results show a positive impact of liquidity on dividends. This finding is consistent across different model specifications controlling for both firm and industry fixed effects. The liquidity-dividend relationship is robust to the difference-in-differences approach using the removal of broker identity in ASX in 2005 as an exogenous shock to stock market liquidity. The results further find that liquidity positively affects dividends as it reduces cash flow uncertainty. In addition, the imputation tax system is shown to have a strong effect on dividends, and this effect weakens the positive impact of stock liquidity on the firm dividends. Innovation competes with dividends for firm equity capital sources, and thus this study finds that the positive impact of stock market liquidity on dividends is less pronounced for firms with greater innovation activities. This chapter contributes to the literature on the determinants of firm dividends by presenting new evidence on the positive impact of market liquidity on firm dividends in the Australian market. It also provides evidence that liquidity impacts dividends by reducing cash flow uncertainty and that the imputation tax system and innovation activities negatively impact on the liquidity-dividend relationship.