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

50 Pages Posted: 22 Mar 2013 Last revised: 24 May 2014

See all articles by Chinmoy Ghosh

Chinmoy Ghosh

University of Connecticut - Department of Finance

Jerry Sun

Invesco Advisers, Inc.

Date Written: March 21, 2013


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.

Keywords: Dividend policy, growth, agency cost, cost of fund, REITs

JEL Classification: G35

Suggested Citation

Ghosh, Chinmoy and Sun, Le, Agency Cost, Dividend Policy and Growth: The Special Case of REITs (March 21, 2013). Journal of Real Estate Finance and Economics, May 2014, Volume 48, Issue 4, pp 660-708. Available at SSRN:

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Le Sun (Contact Author)

Invesco Advisers, Inc.

United States

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