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

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  • Chinmoy Ghosh
  • Le Sun

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

Suggested Citation

  • Chinmoy Ghosh & Le Sun, 2014. "Agency Cost, Dividend Policy and Growth: The Special Case of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 660-708, May.
    • Handle: RePEc:kap:jrefec:v:48:y:2014:i:4:p:660-708
    DOI: 10.1007/s11146-013-9414-3
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    4. David C. Ling & Chongyu Wang & Tingyu Zhou, 2021. "Institutional common ownership and firm value: Evidence from real estate investment trusts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 187-223, March.
    5. Mustafa Cayir & Nasuh Oguzhan Altay, 2021. "Direct and Indirect Effects of Cash Dividend Policies on Firms’ Capital Accumulation in Selected Developed Markets," Istanbul Business Research, Istanbul University Business School, vol. 50(2), pages 235-254, November.
    6. Zainudin, Zalina & Hussain, Hafezali Iqbal & Abdul Hadi, Abdul Razak & ibrahim, izani, 2017. "Debt and Financial Performance of MREITs in Malaysia: An Optimal Debt Threshold Analysis," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 51(2), pages 63-74.
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    8. Desheng Liu & Yizhen Wang & Mingsheng Li, 2024. "Is it just for shareholders or for all stakeholders? Evidence based on carbon emissions and cash dividends from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 4069-4094, December.
    9. Zifeng Feng & Zhonghua Wu, 2022. "Local Economy, Asset Location and REIT Firm Growth," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 75-102, July.
    10. Steffen Westermann & Scott Niblock & Michael Kortt, 2018. "Corporate social responsibility and the performance of Australian REITs: a rolling regression approach," Journal of Asset Management, Palgrave Macmillan, vol. 19(4), pages 222-234, July.
    11. Zalina Zainudin & Mazhar Hallak Kantakji & Omer Bin Thabet & Nur Syairah Ani & Nursyuhadah Abdul Rahman, 2019. "An Investigation of the Moderating Effect of Liquidity on the Relationship between Debt and Financial Performance of REITs in Malaysia: An Optimal Liquidity Estimation," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(3), September.
    12. Stanimira Milcheva & Yildiray Yildirim & Bing Zhu, 2021. "Distance to Headquarter and Real Estate Equity Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 63(3), pages 327-353, October.

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