REIT excess dividend and information asymmetry: evidence with taxable income

Abstract

Purpose -US real estate investment trusts (REITs) typically distribute more dividends than required by tax regulations. This paper aims to focus on discretionary dividends, and examines the impact of information asymmetry on this excess component of dividends. Design/methodology/approach -This paper considers a set of US REITs with reported taxable income figures over the 2000-2007 period, and employs regression analysis to examine the influence of information asymmetry on the excess component of dividends. The explained variable is specified as excess dividends scaled by total assets. Excess dividends are dividends paid over the mandatory dividend payments calculated with taxable income, instead before-tax net income. Following the REIT studies of Hardin and Hill and Han, this study employs Tobin Q as the proxy for asymmetric information. Findings -Contrary to Hardin and Hill's conclusion, but consistent with dividend signaling theory as well as agency cost explanations, the results indicate that REITs with higher level of asymmetric information pay out significantly more excess dividends. Nevertheless, in contrast to Deshmukh's study on manufacturing firms, the REIT results are against the prediction of the pecking order theory. Originality/value -The paper is one of the few studies that explicitly examine the factors influencing REIT decision on discretionary dividends. Contrast to previous studies, this study is able to obtain taxable income and compute the discretionary dividends more accurately. Furthermore this paper is able to provide evidence against the pecking order theory, which is not investigated in the existing REIT dividend studies.

An Examination of Prevalence of Earnings Management in Asia REITs

“…As a conclusion, despite the unique structure of REITs where a mandatory dividend pay-out 90% of total taxable income is imposed and it is believed to be able to mitigate the agency problem in REITs, this study show the earnings management problem still exists in REITs, indicating that there is a need for specific governance mechanisms that can mitigate this problem in Asian REITs. (Ben-Shahar, Sulganik, & Tsang, 2010;Edelstein et al, 2009;Ghosh & Sirmans, 2006;Ghosh & Sun, 2013;Hayunga & Stephens, 2009;Lee, Chiu, Lee, Chiang, & Jr, 2010;Mooradian & Yang, 2001).…”

Factors influencing dividend decisions of Indian construction, housing and real estate companies: An empirical panel data analysis

“…Downs, Guner, and Patteson (2000) and McDonald, Nixon, and Slawson (2000) examined the unfavourable collection cost component of bid‐ask spreads and find significant impacts of REIT dividend policies on their asymmetric information measures. Hardin and Hill (2008) and Lee, Chiu, Lee, Chiang, and Slawson (2010) also found that excess dividends can be used to help REITs become more transparent, and thus have better access to the capital market. Capozza and Seguin (1998) covered the time period from 1985 to 1992.…”

Underlying asset liquidity, heterogeneously informed investors, and REITs excess returns

“…As a result, a higher dividend yield seems to bring more benefits to REIT investors so that the required REIT returns may decrease with dividend yield. Besides, Lee et al (2010) document that REITs with higher degree of asymmetric information pay out more dividends. So, the required REIT returns may be associated with dividend yield from the information asymmetry perspective.…”