Cash flow volatility and dividend policy

Abstract

The dividend debate between agency cost theory and information signaling theory provides opposite explanations of the relationship between dividend payout and cash flow volatility. This empirical study tests these two theories with a sample of 135 public equity US REIT firms from 1985 to 2003. The study explores the role of expected cash flow volatility as a determinant of dividend policy for REIT industry, by employing the panel regressions on excess dividend payout. We find strong evidence of REIT firms paying out substantial excess dividend to avoid potential agency cost when the future cash flow is more volatile. The information signaling theory plays a relatively minor role in REIT firms' dividend policy.