Dividends and Cost of Capital - An Empirical Study on REITs
||Dividends and Cost of Capital - An Empirical Study on REITs
||18th Annual European Real Estate Society Conference in Eindhoven, the Netherlands
||Given a firm's investment policy, its dividend policy is irrelevant (Miller and Modigliani (1961)). REITs, by law, pay at least 90 percent of their corporate income into dividends so their dividend policy is given. This is flipping of the dividend irrelevance theorem. Such a high dividend payment also means lower retained earnings so little free cash flow. Jensen (1986) argues lower free cash flow results in mitigated agency problems. In this paper, I ask 2 questions - first, how an average REIT, given its dividend policy, responds to its investment opportunities and second, if an average REIT (with mitigated agency problems) faces lower financing constraints. For the 1st question, I find that an average REITs investment responsiveness is higher than other firms. For the 2nd question, I find that an average REIT faces, in fact, higher financing constraints than other firms.
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||P1: RE Finance and Investment (I) [doctoral session]
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