Dividend Policy and Cash‐Flow Uncertainty

Michael Bradley, Dennis Capozza and Paul J. Seguin

Real Estate Economics, 1998, vol. 26, issue 4, 555-580

Abstract: We explore the role of expected cash‐flow volatility as a determinant of dividend policy both theoretically and empirically. Our simple one‐period model demonstrates that, given the existence of a stock‐price penalty associated with dividend cuts, managers rationally pay out lower levels of dividends when future cash flows are less certain. The empirical results use a sample of REITs from 1985 to 1992 and confirm that payout ratios are lower for firms with higher expected cash‐flow volatility as measured by leverage, size and property‐level diversification. These results are consistent with information‐based explanations of dividend policy but not with agency‐cost theories.

Date: 1998
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