DIVIDEND POLICY OF LISTED PROPERTY TRUSTS IN AUSTRALIA

Abstract

This paper attempts to explore cash flow volatility of Listed Property Trusts in Australia as a determinant of dividend payout. Previous researches on Real Estate Investment Trusts(REITs) have been inconclusive as both Information Signaling Theory and Agency Cost Theory are supported. Information Signaling Theory states that in the event that cash flow is volatile, managers tend to choose a lower dividend payout so that a drop in shareholder's wealth can be prevented. Following empirical findings of Wang, Erickson and Gau (1993) and Bradley, Capozza and Seguin (1998), this paper's empirical result does not favour the Agency Cost Theory as none of the empirical results support it. The empirical results use a sample of 15 Listed Property Trusts in Australia from 1995 to 2004 and confirm that leverage favours the Information Signaling Theory which predicts a negative relationship between leverage and dividend payment. Market value of a Listed Property Trust is a poor proxy for cash flow volatility as it is insignificant. Diversification as independent variables provides inconsistent results as geographical diversification are positively significant thereby supporting the Information Signaling Theory while sector diversification contradicts it. International diversification is insignificant. The inconsistent results undermine the extent of the empirical evidence to support the Information Signaling Theory.