Agency Cost, Dividend Policy and Growth: The Special Case of REITs

Chinmoy Ghosh () and Le Sun ()

The Journal of Real Estate Finance and Economics, 2014, vol. 48, issue 4, 660-708

Abstract: Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth. Copyright Springer Science+Business Media New York 2014

Keywords: Dividend policy; Growth; Agency cost; Cost of funds; REITs (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s11146-013-9414-3

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