WHY DO S-REITS PAY EXCESS DIVIDENDS?

Abstract

A cursory explanation of a REIT’s dividend policy is the regulatory environment it operates in. While a closer examination of dividend payments uncovers significant discretionary behavior among S-REITs, circumstances warrant a timely opportunity to examine the motivations behind making excess payments. Broadly, the accounting treatment of property depreciation and non-cash charges permits the available income of a REIT to surpass its taxable requirements. On average, the industry’s payout ratio varied between 114% and 149%. It suggests that the blanket assumption, which contends that REITs adopt a payout solely contingent on tax legislatives, is not entirely true. Excess or discretionary payouts, described as the dividend payments made over and above mandatory requirements, measure the extent of managerial discretion. By analyzing 360 quarterly observations of 18 publicly listed S-REITs over the 2008 to 2012 period, panel regression results find that S-REITs pay excess dividends to reduce agency costs and cater for signaling considerations. Findings also attest strongly toward the merits of the information relevance proposition, which sees managers of opaque firms make greater excess dividends. By doing so, REITs lower the extent of information asymmetry and are likely to improve their access to capital markets. Taking the analysis further, the study measures excess return and evaluates the penchant for excess dividends. Contrary to research prediction, evidence point perplexingly towards investors’ aversion and dislike for excess payments. In all, the paper extends the body of literature and offers fresh perspectives on a REIT’s dividend policy by accentuating the excess component of dividend payouts.