Elective Stock Dividends and REITs: Evidence from the Financial Crisis
Real Estate Economics, Forthcoming
Posted: 7 Aug 2012
Date Written: August 7, 2012
In response to the recent financial crisis, the U.S. Government introduced new rules which allow REITs to issue elective stock dividends, i.e., non-cash dividends, to satisfy their distribution requirements. The purported goal of these rules was to provide temporary relief to REITs facing cash flow problems. We investigate how the introduction of these rules affects dividend policy of REITs. Surprisingly, we document that only 17 REITs chose to issue elective stock dividends. We examine the characteristics of these REITs and find that their cash flows are similar to REITs that do not select these dividends. This suggests that cash flow problems are unlikely to be the primary determinant of the elective stock dividend issuance decision. Instead, our findings indicate the decision to pay elective stock dividends is related to the level of loans that are close to maturity, REIT-size, growth prospects, and poor performance during the financial crisis. Furthermore, we find that the same factors determine the ratio, amount, and frequency of stock dividends issued by these REITs. We also examine the response of shareholders to elective stock dividends announcements and find positive abnormal returns surrounding these dividend announcements.
Keywords: REITs, Dividend Policy, Stock Dividends, Financial Crisis
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