Information Content and Dividend Policy of Publicly Listed Real Estate
Firms in Singapore
SING, Tien Foo*
Department of Real Estate
National University of Singapore
Date: 22 July 2004
Abstract:
Publicly listed real estate firms offer an indirect form of real estate investment in
Singapore, which are less restrictive in terms of dividend distribution and asset holding
requirements compared to the REITs. Do the dividend policies of these real estate firms
differ from those adopted by the US REITs as shown in the earlier findings by Wang,
Erickson and Gau (1993) and Bradley, Capozza and Seguin (1998)? Our empirical results
favor the agency costs hypothesis, which predicts a positive relationship between firms’
debt-to-asset ratio and dividend payouts. The agency costs effects were mainly
differentiated by the dividend yields of real estate firms. Firm size was not a good proxy
for cash flow volatility, and there were no significant signal in the dividend policy of
firms with different market capitalization. The results rejected the dividend signaling
hypothesis. However, the value-penalty hypothesis of Bradley, Capozza and Seguin
(1998) that imposes downward corrections of stock prices for firms that fail to meet the
divided target was not rejected. Firms with constant dividend payouts were also penalized
with a 7.6% discount to the stock price compared to firms that distribute higher dividends
than the previous years.
Keywords: Signaling hypothesis, Agency Cost, Dividend Payouts
*Corresponding Author. Email: rststf@nus.edu.sg. Address: Department of Real Estate, National University of
Singapore, 4 Architecture Drive, Singapore 117566. The author wishes to thank LEE, Sze Teck for his research
assistance. Errors, if any, remain the responsibility of the author. Comments are welcome.
Information Content and Dividend Policy of Publicly Listed Real Estate Firms in Singapore
1.
Introduction
The regulatory requirement to distribute at least 90% of the net income as dividends is a
unique feature distinguishing real estate investment trusts (REITs) from other forms of
equity investment. This mandatory restriction is not strictly binding as many US REITs
have been distributing more than twice the income as dividends (Wang, Erickson and
Gau, 1993; Bradley, Capozza and Seguin, 1998).1 Does a high dividend payout matter to
REIT investors? In the perfect world of Miller and Modigliani (1961) with no taxes and
transaction costs, the dividend policy is irrelevant in determining the value of a firm.
However, a change in dividend payout rate reflects important information concerning the
management’s view of future earning prospect of the firm (Lintner, 19562; Modigliani
and Miller, 1959). Miller and Modigliani (1961) further claim in the “information content
of dividend” hypothesis that a change in dividend payout rate does matter, if the expected
future earnings that cause the change in dividend payout rate is permanent in nature.
The irrelevance of the high dividend payout ratio of REITs can also be explained using
the dividend clientele hypothesis (Modigliani and Miller, 1961). Based on the hypothesis,
we will expect the high dividend yield instrument to appeal to clienteles in the low
income tax bracket group. Institutional investors with high income tax liability will be
disadvantaged by the high dividend payouts of REITs. However, there is no empirical
evidence thus far to verify whether the REIT clientele are composed of investors who
prefer high dividend payouts. The dividend clientele effects, if exist, would not persist.
When demand for the high dividend yield stock has been satisfied, the stock prices will
be corrected at equilibrium. Further changes to the target dividend policy thereafter
would have no significant impact on the firm’s share price.
Would the dividend irrelevance hypothesis prevail for REITs, which are actively
involved in trading real estate in a market characterized by imperfect information? Wang,
Erickson and Gau (1993) found that REIT managers raise debt capital to fund a higher
dividend payout policy, and subject themselves to the monitoring by the external capital
market. Managers of REITs (agents) with access to free cash flows may be inclined to
undertake sub-optimal investment projects that are not in the best interest of the investors
(principals). Paying out a high ratio of dividend over income can be a good way to
indirectly reduce the free cash flow agency problem. In a separate empirical test using 75
equity REITs over the 1985-1992 sample period, the results of Bradley, Capozza and
Seguin (1998) study contradicted the earlier findings in the agency-cost hypothesis. They
showed that REIT managers are more reluctant to pay high dividends when the debt level
of REITs is high. The lower dividend payouts serve as a signal of future cash flow
1
2
Wang, Erickson and Gau (1993) showed that the dividend to income ratio is 1.65 based on 123 REITs
selected in the study in 1988. Depreciation expense provides the main source of cash flows
distributable back to REITs investors as dividends.
Lintner (1956) found empirical evidence of 28 sample firms, which rely on current earning and its
relationship with the existing dividend rate to determine the future change in dividends. Modigliani
and Miller (1959), however, stress that it was the expected future earning, and not the current earning,
that will affect the dividend payout rate of a firm.
1
volatility. The results were consistent with the information content of dividend hypothesis
or the signaling hypothesis for REITs. The conflicting results of Wang, Erickson and Gau
(1993) and Bradley, Capozza and Seguin (1998) with respects to the validity of the
agency cost and the information signaling hypotheses may mean that the dividend puzzle
remains unresolved in the REIT market, like in many other asset markets.
Real estate market is a highly imperfect marketplace inherited with characteristics like
fragmentation in transactions, illiquidity, high transaction costs, inefficient information,
heterogeneous product type and high barrier of entry in some countries. Information
asymmetric is inevitable between the manager (agent) and investors (principal) of REITs,
which have more than 70% asset holdings in real estate. With the 90% mandatory
distribution of REIT income, using retained earnings as internal capital will not be an
option for REIT managers in real estate acquisitions. Although, Wang, Erickson and Gau
(1993) and Bradley, Capozza and Seguin (1998) argue that the 90% dividend rule does
not constraint how the managers could optimize their dividend policy either to instill
more market discipline in monitoring the investment decisions, or to send signal of the
cash flow volatility in the future.3 It does not, however, suggest that the resulting capital
structure that relies heavily on external capital will be the most cost-effective and optimal
for RETIs. Therefore, to eliminate the effects associated removing the “artificial”
constraint on the dividend payout rate and other asset holding restrictions for REITs4, this
study proposes to use all public firms listed in the real estate section of the Singapore
Exchange to empirically test the firm-specific dividend policy in the real estate industry.5
This paper is organized into six sections. Section I gives the background and objectives
of the study. The motivation of why the listed real estate stocks are selected for the
empirical tests is also discussed. Since the dividend irrelevance proposition was
conceptualized by Miller and Modigliani (1961), research on this topic has expanded
profusely in financial literature.6 Therefore, the literature review intended in Section II
will no way be exhaustive, but it makes sure that important and relevant papers will be
selectively reviewed in the study to provide sufficient reference to the empirical findings.
Section III discusses the dividend signaling and agency cost model and also specifies the
empirical model for subsequent empirical tests. Section IV covers the empirical
methodology, which includes data collection, sample statistics, and hypothesis testing
methods. The empirical results are analyzed in Section V, and implications are drawn.
Section VI concludes the findings with highlights of relevant implications for investors
who hold substantial securitized real estate assets in the portfolio.
3
4
5
6
Lu (2002) showed in her study that REITs pay dividend in excess of the mandatory 90% requirement
to reduce agency problem, and she, therefore, suggests that the regulatory provision is unnecessary for
REITs.
REITs are required to invest 75% of the equity capita in real estate related assets, and 75% of their
income must be generated from rents from real estate and interests of real estate mortgages. In
Singapore, there is also a restriction on REIT to undertake development activities, or to purchase
vacant lands with development potential.
Howe and Shen (1998) empirically tested the intra-industry information effects of dividend initiation
announcements, and found that dividend initiation policy is firm-specific. This implies that our test of
dividend policy of listed firms in real estate industry will not be biased.
See Allen and Michaely (1995) for a comprehensive review of the dividend policy literature.
2
2.
Literature Review
Based on Miller and Modigliani (1961) irrelevance of dividend proposition, the firms’
decision on how their earnings should be divided between retained earnings and
distribution as dividends back to investors does not matter in a perfect market. The
dividend will not have any significant effects on the firm’s cost of capital, and the
performance of the firm remains stable as long as the management’s decisions on
financing and investment are not changed.7 The empirical results of Black and Scholes
(1974) supported the dividend irrelevance proposition, and they found no significant
effects of dividend policy changes will have on the firm stock prices. Modigliani and
Miller (1959), however, suggest that dividend changes do convey information of the
expected future earnings of firms, which is permanent.8
What information does the dividend changes convey? Battacharya (1979) John and
Williams (1985), Miller and Rock (1985) develop theoretical signalling models that
explain how firms’ current and future earnings can be signalled by dividend changes of
firms under an asymmetric information framework.9 Signals of firms’ future cash flow
volatility can also be conveyed by dividend changes of the firms (Eades, 1982; Rozeff,
1982; and Kale and Noe, 1990). There was no conclusion empirical evidence supporting
the signalling effects of dividend changes. Fama and French (1988) showed that dividend
yields explain only a small fraction of the short-horizon stock returns variations. Watts
(1973) tested 310 firms in the US over the period 1945-1968 and found no compelling
evidence that dividend changes convey significant information on the firms’ future
earnings. In Kao and Wu’s (1994) generalized friction model, evidence of significant
signalling effects of dividend changes on both expected and unexpected permanent
earning change was observed after dividend stickiness was removed. The dividend
signalling hypothesis was also supported by the empirical results of Brook, Charlton and
Hendershott (1998), which showed direct link between cash flow shocks, dividend policy
and stock returns.
The signalling effects were not constant across firms. Lang and Litzenberger (1989) and
Koch and Shenoy (1999) using Tobin’s Q ratio to differentiate the dividend signalling
effects between under-investing and over-investing firms. Lang and Litzenberger (1989)
found that stronger signalling effects of dividend in firms with over-investment (low-Q
ratio). Koch and Shenoy (1999), however, showed that the relationships between
signalling strength and the Tobin’s Q measure were well represented by a U-shape curve.
Firms on both end of the investment scale (over-investment and under-investment) react
more strongly to dividend information. The results were consistent with the free-cash
flow agency hypothesis proposed by Jensen (1986), which suggests that firms will pay
out more dividends to reduce the free-cash flows that are available for the managers’
7
8
9
Cornell and Shapiro (1987) and Holder, Langrehr and Hexter (1998) found significant interaction
between dividend and investment policies through empirical tests of the stakeholder hypothesis.
Marsh and Merton (1987) found that the permanent earnings were better measured by stock price
changes than accounting earnings.
There were various signalling incurred, which include foregone funds for productive investments
(Miller and Rock, 1985), transaction costs in issuing and retiring stocks (Battacharya, 1979; John and
Williams, 1985), tax losses and liquidity demand by different clientele (John and Williams, 1985).
3
disposal. An alternative explanation for the high dividend payouts by low-Q firms was
given by Easterbrook (1984) using the agency cost hypothesis. He observed that high
growth firms pay out large dividends and raising new capitals simultaneously to support
their investment activities. The firms’ dividend policies and external capital funding solve
the agency problems by reducing the monitoring costs and risk aversion of managers.
Wang, Erickson and Gau (1993) used the agency-cost hypothesis to predict the dividend
policies and the determinants of the dividend payouts for REITs. Testing the dividend
policy of 102 sample equity and mortgage REITs in the US over the period 1981-1988,
they found significant evidence to support the agency cost hypothesis. Higher dividend
paying firms are closely associated with firms with higher debt to asset ratios. The firms
are subject to stricter monitoring by the external capital market. The trade-off for the
lower agency costs in monitoring the managers’ behaviour is the corresponding higher
floatation costs in external capital raisings (Rozeff, 1982; and Easterbrook, 1984). The
negative relationship between dividend payout changes and asset growth rate found in
this study was consistent with Rozeff’s (1982) agency cost argument, which suggests a
direct link between dividend and investment policies. Different wealth effects of dividend
payouts across equity REITs and mortgage REITs was another significant finding of
Wang, Erickson and Gau (1993) study. Information of future cash flows of real estate in
equity REITs portfolio is more unpredictable. Therefore, dividend payout changes for
equity REITs convey more valuable information for investors, which was evidenced by
higher dividend announcement wealth effects in equity REITs.
In deciding the optimal dividend payout, Rozeff (1982) argues that firms evaluate the net
benefits of lowering agency costs with possible increases in transaction costs in issuing
external finance. His empirical results showed that firms’ dividend policies is inversely
related to both firms’ past and future growth and systematic risks. The agency cost
prediction by Rozeff (1982) on systematic risks was not inconsistent with the dividend
signaling hypothesis (Eades, 1982; and Kale and Noe, 1990). Bradley, Capozza and
Seguin (1998) use wealth-penalty for shareholders of firms experiencing cuts in dividend
payouts as the signaling costs in explaining the dividend policy and cash flow volatility
relationships. Their one-period wealth-penalty model predicts that managers of firms
with volatile future cash flows pay lower dividends to avoid the possibility of having to
cut dividends in the future. They empirically tested the information signaling effects of
the model using three variables as proxies for cash flow volatilities: firm size, leverage
and portfolio diversification. Using the dividend and firm data for a sample of 75 equity
REITs over the period 1985-1992, they found that large firms with lower leverage are the
ones with higher future cash flow uncertainties. These firms use lower dividend payouts
as signal of the higher systematic and unsystematic risks of the firms. The negative
relationship between dividend payouts and the debt to asset value (leverage measure)
rejected the agency costs prediction found in earlier study by Wang, Erickson and Gau
(1993).
Using the dividend and financial data of non-REIT real estate firms listed in the UK
between 1986 and 1998, Ooi (2001) re-affirmed the dividend signaling results of Bradley,
Capozza and Seguin (1998). Dividend policy convey a positive signal of the future cash
4
flow volatility of real estate firms, and the results indirectly imply that information
content of dividends is independent of the mandatory distribution constraint of dividend
payout imposed on REITs. We extended the empirical tests of the dividend signaling and
the Miler and Modigliani’s (1961) dividend irrelevance 10 hypotheses using listed
Singapore real estate firms, which are not bounded by the statutory dividend distribution
requirements. Compared to the UK real estate firms in Ooi’s (2001) sample, real estate
firms in Singapore are not subject to capital gain tax in their dealings, and the dividend
clientele effects with respects to different tax preferences are not critical in our model.
Therefore, the results of our tests on the information content of dividends and the
shareholders’ wealth can be interpreted purely in the signaling and information
asymmetric framework.
3.
Information Content of Dividends: Hypotheses and Empirical Specifications
Testable hypotheses with respects to the irrelevance of dividends and information
signalling of dividends will be empirically verified in this study using listed real estate
firms in Singapore. Based on the basic empirical framework of Bradley, Capozza and
Seguin (1998), two empirical models: value-penalty stock return model and dividend
payouts model; are specified below for our empirical test purposes:
3.1.
Value-Penalty Stock Return Model
In dividend irrelevance hypothesis of Miler and Modigliani (1961), stock return is
independent of dividend policy of firms, and there is no positive wealth effects associated
with the announcement of dividend payouts. However, Bradley, Capozza and Seguin
(1998) develop a one-period value-penalty model, which predicts that firms’ stock price
will be inversely corrected, if firms declare cuts in dividend payouts. Discrete binary
indicators are included into the stock return model to capture the cross-section variations
of firms experiencing dividend cuts, and those practice stable “target payouts” policy.
According Bradley, Capozza and Seguin (1998), it is the direction, and the magnitude of
changes in dividend payouts that matters to investors. We propose the following stockprice model with discrete dividend cut indicator to test the irrelevance of dividends
hypothesis:
Ri,t = b10 + b11∆DYi,t + b12∆Di,t + b13(RIi) + b14(NCi) + ciXt + di + ui
(1)
where b10 is the overall constant in the model; bk is the common coefficient for the
controlled variable; ci is the coefficient for the cross-sectional specific variable Xt; and, di
and ui are the fixed cross-sectional specific effects and the error terms of the regression
respectively.
The dependent variable, Ri,t, is represented by the log-difference of the total return index
of stock i, i.e [Ri,t = log(TIi,t) – log(TIi,t-1)], where TIi,t is the total return index of firm i,
which captures both dividend and price gain from year t-1 to year t. The independent
variables in equation (1) consist of (i) ∆DYi,t, which is the year-on-year change in
10
The dividend irrelevance hypothesis, which rejected any wealth effects associated with dividend policy
announcements, was not tested in Ooi (2001) study. His empirical tests focus solely on the relationship
between dividend payouts and the dividend determinants.
5
dividend yield variable; (ii) ∆Di,t, which measures the changes in dividend per share of
firm i, i.e. [Di,t – Di,t-1]; (iii) RI is the binary dividend reduction variable, which has a
value of 1 for firms experiencing a cut in dividend in year t compared the previous year,
or 0 otherwise; (iv) NI is the no-change binary indicator that differentiate firms that adopt
fixed and stable dividend policy with no–change in current year dividend payouts over
the previous year with [NI = 1], vis-à-vis other firms with different divided policy year
on year, [NI = 0]; and (v) Xt is the market specific variable, which is included in equation
(1) to capture the cyclical fluctuation in the real estate market. The All-Property Share
index return, which is the aggregate performance indicator of the property sector of the
Singapore Exchange (SES), is used as proxy for this variable in equation (1).
Based on equation (1), two hypotheses can be independently tested:
(A)
Miler and Modigliani’s (1961) dividend irrelevance hypothesis:
H0(A): “In a perfect world with no tax, no transaction costs and no information
asymmetry, there are no wealth effects accrued to shareholder with respects to
changes in dividend policy. Dividend payouts are irrelevant to the stock price
changes.”
(B)
Value-penalty hypothesis (Bradley, Capozza and Seguin, 1998):
H0(B): “There is an economical significantly discrete penalty on share price of firms
experiencing of cuts in dividend payouts. The decline in the stock value is
dependent on the dividend reduction and not the magnitude of the cut.”
H0(A) is not rejected, if the coefficient b11 in model (1) is not significantly different from
zero, and dividend is thus irrelevance. The result implies that dividend changes of firms
would not have any effects on the stock returns. Conditional on the dividend irrelevance
results, we should then expect the stock return to be positively related to the earnings
generated by the firms. If the null hypothesis is rejected, free-cash flow hypothesis and
signaling hypothesis may be supported if the dividend changes are positively related to
the stock returns, because managers of firms with excess cash flows will tend to
distribute high dividend, so as to reduce agency problem relating to investment in suboptimal projects. The [b11 = 0] results could also use to explain the dividend clientele
hypothesis, which suggests that investors are indifferent between receiving high dividend
payouts over future capital gains, if they are not subject to differential tax rates. If
clientele effects prevail and firms adjust their dividend policy to appeal to investors in the
high income bracket, we would expect a negative relationship between dividend payouts
and stock return.
To further test the irrelevance of dividend effect, we use the discrete variable, NC, to
differentiate firms adopting constant and stable dividend policy over other firms with
either upward or downward adjustment to dividend payouts. We expect b14 to be
statistically insignificant, if we expect that firm with no change in dividend policy to earn
no abnormal returns over other firms.
6
The binary dividend reduction variable, RI, is included to test the wealth-penalty effects
associated with reduction in dividend payouts by firms. We expect the coefficient b13 to
be significantly negative, if the H0(B) hypothesis in Bradley, Capozza and Seguin (1998)
value-penalty proposition is not to be rejected. The results then imply that the market
does impose a fixed penalty or charge on the stock prices of a firm, when it declares a cut
in dividend payouts. Positive empirical results in support of the value-penalty hypothesis
were obtained by Bradley, Capozza and Seguin (1998) in their empirical tests using the
US equity REITs.
3.2.
Dividend Payouts Model
The second model is a dividend payouts model, which is specified to test two seemingly
contradictory 11 dividend payout hypotheses: agency cost hypothesis and dividend
signalling hypothesis. The empirical dividend payout model is similar to that used by
Bradley, Capozza and Seguin (1998), which consists of current and lagged period
earnings, two measures of firm-specific uncertainty, and the market-wide control
variable, which is written as follows:
Di,t = b20 + b21 Yi,t-1 + b22 ∆Yi,t + b23 Ai,t + b24 Li,t + ci Xt + di + ui
(2)
The dependent variable, Di,t, is the dividends per share paid-out over the fiscal year t. Yi,t-1
is the lagged period earnings per share of firm i. ∆Yi,t is difference in ln-earnings per share
of firms over the previous year, [Yi,t – Yi,t-1]. The two volatility variables are represented
by A, which is the firm size variable measured by the market value of assets of firm i;
and L, which is the leverage ratio computed as the total debt over the total asset value of
firms. Following Bradley, Capozza and Seguin (1998) approach, we replace the two cash
flow volatility variables, A and L, with a single fitted earnings variable, Zi,t, which is a
linear combination of the firm asset value (A) and the leverage (L) variables. This is done
in a two-stage process, where we first regress the dividend yield on the firm asset values
and the leverage variable, and then substitute fitted value, Z i ,t , for A and L in equation (2)
in the second stage process.
Two opposing hypotheses relating to dividend payouts are tested using the regression
model in equation (2):
(C)
Agency Costs Hypothesis (Rozeff, 1982; Easterbrook, 1984; Wang, Erickson and
Gau, 1993; and others)
H0(C): “In the absence of non-dividend monitoring mechanism in place, high dividend
payouts are made by managers of firms, and simultaneously they raise capital
from external market for new investments. The flotation costs incurred in new
11
The results of the earlier empirical studies on REITs in the US by Wang, Erickson and Gau (1993) and
Bradley, Capozza and Seguin (1998) appear to be contradictory, and were inconclusive on whether the
agency cost hypothesis or the signaling hypothesis prevails in explaining the dividend policy of firms.
7
capital raising exercise can be offset by the benefit of lower agency costs. The
free cash flow can also be curbed to minimize overinvestment risks.”
(D)
Dividend Signaling Hypothesis (Eades, 1982; Kale and Noe, 1990; Bradley,
Capozza and Seguin, 1998; and others)
H0(D): “Dividend payouts are viewed as a signal of firms’ future cash flow volatility.
Firms are penalized by market with a downward adjustment in their stock prices,
when the firms reduce their dividend payouts. Therefore, when the expected future
cash flows of firms are uncertain, the firm will adopt a more prudent dividend
payout policy to avoid the value-penalty on their stocks.”
The dividend signaling hypothesis of Lintner (1952) and Miler and Modigliani (1961)
predict that dividend payouts carry the signal of current and future permanent earnings of
firms. If the hypothesis is not rejected, we expect the coefficients b21 and b22 on earnings
and earning changes to be significant and positive. On the signaling effects through the
value-penalty hypothesis proposed by Bradley, Capozza and Seguin (1998), two variables
were used to represent the cash flow uncertainty. The firm size is an inverse measure of
cash flow uncertainty, which means that larger firms based on the asset values are more
diversified in their cash flow sources, and thus the volatility of cash flows of these firms
is also lower. There is, therefore, a positive relationship between the market asset values
and the dividend payouts of firms, i.e. [b23 > 0]. Leverage or debt to asset value ratio is
the second measure of cash flow, and it is an important variable in model (2), which will
distinguish between the agency cost and the signaling hypotheses above. Firms with
higher debt to asset value ratio are firms with higher cash flow volatility; and under the
signaling hypothesis of Bradley, Capozza and Seguin (1998), these firms will likely to
payout lower dividends in order to avoid market penalty on their share values, if they are
not able to sustain the same level of dividend payouts, i.e. [b24 < 0]. If the coefficient b24
turns up to be significant, but positive in the sign, [b24 > 0], the agency costs hypothesis
is not rejected, which implies that firms are more likely to pay out high dividend to
increase external monitoring through debt capital market discipline. Firms may tend to
raise debt from the market to fund new investments, and to meet the high dividend target
set by managers.
4.
Empirical Methodology
4.1.
Data Sample
The sample firms in our empirical tests are selected from firms listed under the “Property
Section” of the Singapore Exchange (SES). Stock prices and financial data were obtained
from the DataStream over a 12-year sampling period from 1992 to 2003. The sample
periods cover one full property cycle in Singapore from the upward trend in the early
1990s to the boom in 1995 following by the bursting of the bubble in 1997 and the
recovery from 2002. To ensure consistency in the sampling selection, the following
criteria are adopted:
8
a) These firms must be listed in the property section of the Singapore Exchange
(SES), and a substantial portion of the firms’ earnings are generated from
property related businesses;
b) Companies must have declared at least one dividend payout during the sample
periods;
c) Firms listed in foreign-currency denomination on SES and those with their main
property business located outside Singapore were excluded; and
d) Firms listed for less than 5 years were not considered because the relatively short
financial data series.
Based on the above criteria, three REITs, which come onto the SES market after 2002
were dropped from the sample list. Firms like Allgreen Properties Limited, Heeton
Holdings Limited, HiapHoe Limited, HoBee Investment Limited, which were listed after
1999, were also excluded. Listed foreign-based property companies like Australand
Holdings Limited, Cheung Kong (Holdings) Limited, AV Jennings Homes Limited and
Hysan Development Company, whose business activities are distributed outside
Singapore, were also dropped from the sample list. The final sample list includes 18 real
estate firms listed on SES, which is shown in Table 1. The financial and price data of the
firms over the 12-year sample period were collected, which consist of a total of 198
observations.
Table 1: List of Sample Real Estate Firms
No. Firm Code
Company Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
*
#
SCOT
BONV
BKSE
CPTL
CHMI
CITY
CMHD
GUOC
HONG
KPPL
LCDV
MARC
MCLL
OPHH
SCGD
SLND
UOLD
WING
The Ascott Group Ltd
Bonvests Holding Ltd#
Bukit Sembawang Estates Ltd#
Capitaland Ltd*
Chemical Industries (Far East) Ltd.#
City Developments Ltd
China Merchants Holdings (Pacific) Ltd#
Guocoland Ltd
Hong Fok Corporation Ltd
Keppel Land Ltd
L C Developments Ltd
Marco Polo Developments Ltd#
MCL Land Ltd#
Orchard Parade Holdings Ltd#
SC Global Developments Ltd
Singapore Land
United Overseas Land Ltd
Wing Tai Holdings Ltd
Year of Listing
on SES
1991
1973
1968
1989
1973
1963
1981
1978
1981
1973
1973
1981
1967
1968
1982
1963
Before 1989
1989
The now de-listed entity DBS Land was the predecessor of CapitaLand, prior to the merger of
Pidemco Land and DBS Land to form the largest real estate company in the Asia in November
2000 .
There were missing data for the total debt to total asset value data for some years in these firms,
and could not be traced from the firms’ annual reports.
9
4.2.
Descriptive Statistics - Dividend Policy of Sample Real Estate Firms
On average, the 18 sample real estate firms pay out S$0.46 dividends per share, or an
equivalent dividend yield of 2%, over the sample period 1992-2003. Bukit Sembawang
Estate Limited paid out the higher divided per share of S$0.45 in 2003, and made the
highest earning per share of S$1.38 in 1997. In term of dividend yield, Guocoland
Limited recorded the highest yield of 15.65% in 1998. United Overseas Land (UOL) has
the most generous dividend policy by distributing 65.39% of the net earnings back to
investors as dividends. Figure 1 shows the historical time trends for the average dividend
yields and average earnings per share of the sample real estate firms over the sample
periods 1992-2003. The highest earning per share was recorded in 1997 at S$0.24 on
average, and the highest average dividend yield of 4.86% in 1998, one year after the
Asian’s financial crisis. The highest divided yield was attributed to the sharp decline in
the average prices with at year-on-year change of -64.9% between 1997 and 1998.
The 12-year descriptive statistics of the common pooled of 18 real estate sample firms
were summarized in Table 2. The market values of the real estate firms were averaged at
S$1.076 billion, and the largest capitalized firm was City Development Limited with a
market value of S$10.933 billion. The performance of the real estate firms over the
sample period was lacklustre registering a negative annual total return of 0.5%. The
average values of the RI and NC indicators show that real estate firms in Singapore
adopted a more conservative dividend policy with about 62.6% of the firms keeping their
dividend policy constant over the sample periods. Only 14.6% of firms announced
dividend cuts during the same periods.
Table 2: Descriptive Statistics of Common Pooled Sample
Symbol
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
4.4
Total
Return
Dividend
Yield
Dividends
Per Share
(S$)
Earning
Per
Share
(S$)
TR
-0.005
0.012
0.597
-0.764
0.213
-0.690
5.132
∆D
0.020
0.015
0.157
0.000
0.020
2.562
15.264
D
0.046
0.030
0.450
0.000
0.061
3.246
17.784
Y
0.117
0.060
1.380
0.000
0.182
3.311
17.827
Total
Debt to
Total
Asset
Ratio
L
0.346
0.353
0.681
0.000
0.152
-0.079
2.278
Market
Value
(S$ mil.)
Dividend
Reduction
Indicator
Dividend
NoChange
Indicator
A
1076.489
469.710
10933.180
19.920
1629.545
3.022
14.065
RI
0.146
0.000
1.000
0.000
0.354
2.000
4.999
NC
0.626
1.000
1.000
0.000
0.485
-0.522
1.272
Regression Models
Based on the stock return model and the dividend payouts model in equations (1) and (2),
we will test various competing hypotheses on dividend policy, particularly the agencycost hypothesis and information signaling hypothesis. There are two widely used methods
to structure the sample data sets, which consist of both cross-section firm related and
time-series characteristics. The pooled data structure assumes the cross-sectional
10
properties of the firms to be constant and homogenous over times. On the other hand, the
panel data structure is adopted if the cross-sectional firms’ differences are significant in
affecting the variations in the explanatory relationships. Two set of regressions: pooled
regression and panel regression will be estimated for our analyses. The fixed crosssection specific effects and the time-series fluctuations in the panel and pooled regression
models are respectively controlled using a di vector and the all-property share returns, Xt.
In the dividend payouts model (2), we would test the market value, Ai, and the total debt
to total asset ratio, Li, as two proxies of cash flow uncertainties, and also use the fitted
dividend yield variable, Z i ,t , as alternative cash flow volatility variable in the model. To
further differentiate whether the clientele for high and/or low dividend yields will have
effects on the relationships between firms’ dividend policy and leverage, we add an
interactive variable, [DYi*Li], to the model (2).
5.
Analysis of Results
Two sets of regression using pooled data and panel data structures are run and the results
are summarized in Tables 3 and 4. Table 3 summarizes the total stock return models as
defined by equation (1), which is used to test the information signaling hypothesis by
Miler and Modigliani (1961) and the value-penalty hypothesis by Bradley, Capozza and
Seguin (1998). The tests of the agency cost hypothesis of Wang, Erickson and Gau
(1993) and the signaling hypothesis of Bradley, Capozza and Seguin (1998) were
reported in Table 4.
5.1.
Is dividend policy relevant?
Three out of the four models (except model 1d) show that b11 coefficients are positive and
highly significant at 1% level, which reject the dividend irrelevance hypothesis, H0(A).
Therefore, the results imply that dividend policy of real estate firms does convey valuable
signal, and the effects of higher dividend payouts are positively adjusted in the share
price of real estate firms. We may expect some form of dividend clientele effects in the
market based on the negative relationship between the total return of stocks and the
dividend yield changes, which are evidenced in all four coefficients, b12. In Singapore,
investors are not subject to capital gain tax for their investments in stock market, they
may therefore prefer to hold real estate stocks that have a more prudent dividend policy.
Are firms’ stock prices be penalized by the market when the firms reported a drop in
dividend payouts? The value-penalty hypothesis proposed by Bradley, Capozza and
Seguin (1998) was confirmed in our models (1b) and (1c), with the stock value-penalty
ranging from 3.88% to 19.38% at a 10% significance level. In the panel regression model
(1d), the dividend no-change indicator was also found to be significant at 5% level, which
suggests that firms with constant dividend payouts will also be penalized albeit at a
smaller margin of 7.63%. The results in Table 3 indicate that the dividend policy is not
irrelevant, and it is construed by the market as an important signal in the price adjustment
process for the real estate stocks.
11
Table 3: Regression Results for Total Stock Return Models
Pooled Regression Model
Model (1a)
Model (1b)
Coefficient#
Coefficient#
Constant
Change in dividend
yield, ∆DYi,t
Change in dividend
per share, ∆Di,t
Dividend reduction
indicator, RIi
Dividend no-change
indicator, NCi
Cross-section specific
effects@
Adjusted R2
-3.2382***
(-5.9504)
0.8565***
(3.2207)
Xt
-3.6628***
(-6.2148)
0.7655***
(2.8398)
-0.0388*
(-1.8414)
0.0008
(0.9242)
Xt
0.8243
0.8443
Panel Regression Model
Model (1c)
Model (1d)
Coefficient#
Coefficient#
0.0012
0.0784***
(0.1088)
(2.846)
-7.6121***
-8.4633***
(-14.2051)
(-15.0309)
1.6175***
0.6634
(4.0610)
(1.4492)
-0.1938***
(-3.9170)
-0.0763**
(-2.3619)
Fixed
Fixed
0.4903
0.5258
The total stock return, Ri,t , is used as the dependent variable for the models.
# t-statistics are given in parentheses
@ the cross-section property stock return specific coefficients for different firms were not reported.
*** indicates 1% significance level
** indicates 5% significance level
* indicates 10% significance level
5.2.
Is dividend policy a signaling or an agency costs reduction mechanism?
Table 4 shows that with the exception in Model (2e), the coefficients for the lagged
earnings per share, b21, and the change in earnings per share, b22, are positive and
significant in all four models at 5% level. In testing whether the dividend signaling or the
agency cost hypotheses are relevant in explaining the dividend policy of the real estate
firms, we will look at the two proxies for the cash flow volatility: firm size and leverage.
According to Bradley, Capozza and Seguin (1998), the firm size variable is an inverse
measure of a firm’s future cash flow volatility. Firms with larger and well diversified
portfolio of assets are more protected against unsystematic risks, and the cash flows of
these firms are also less volatile. These firms will pay out higher dividend compared to
smaller and less diversified firms. Leverage, which is measured by the debt to asset ration
in this study, will also give an indication of how risky is the future cash flow of the firms.
Firms that are highly geared are more prone to future cash flow risk, and they are likely
to pay out smaller dividend.
Our results in the pooled regression models (2a and 2b) do not support the negative cash
flow volatility and dividend payouts relationship proposed by Bradley, Capozza and
Seguin (1998). The results in Table 4 show that firm size in our pooled regression models
are negatively related to the dividend payouts. The findings were more consistent with
the agency cost explanation, which suggests that firms with larger portfolio of assets may
have less free-cash flows for distribution to investors as dividends. More capital will be
required by these firms to support their growth strategies through new acquisitions. In
Singapore, most of the real estate firms are heavily geared. It is more costly for these
firms to raise external capital from the market vis-à-vis internal funding. Moreover, many
12
of the real estate firms in Singapore are family-controlled firms. These firms are more
reluctant to subject the firms to external monitoring. Agency cost is thus higher in the
local real estate firms. The coefficient for the debt to asset ratio variable, b24, was positive
and significant in Model (2a). It was, however, inconsistent with the cash flow signaling
hypothesis of Bradley, Capozza and Seguin (1998). The results supported the agency cost
hypothesis of Wang, Erickson and Gau (1993), which imply that firms raise external
capital to support for a high dividend payout policy, and thus subject the managers to
external monitoring.
We further tested whether the dividend-leverage relationships are subject to clientele
effects of high dividend yield firms by adding an interactive variable into the Models (2b)
and (2e). The results show that the coefficients for the interactive variables are positive
and highly significant at 1% level. We expect that firms in higher dividend yield groups
are likely to increase the firms’ debt-to-asset ratio as an effective mean of putting in place
some forms of market monitoring on managers’ decision. After eliminating the higherdividend yield firms, we can then read the higher dividend payouts of firms as a signal of
lower volatility in the future cash flow.
The fitted dividend yield variable, which is a linear combination of debt-to-asset ratio and
firm size variables, is used to represent the cash flow volatility of the firms in the
dividend payouts models. The results again contradict the signaling hypothesis of
Bradley, Capozza and Seguin (1998). Firms with higher fitted dividend yields may be
associated with growth firms with a dynamic portfolio of real estate. These firms have to
raise more external funds to support portfolio growth strategy and to maintain the
dividend payouts at the same time. The firms with high free cash-flow may also fall into
this category of high fitted dividend yield group. The agency cost hypothesis may suggest
that managers of these firms will pay out large portion of the free cash-flows as dividend
to reduce agency costs resulted by over-investment in sub-optimal assets.
6.
Conclusion
In Singapore, publicly listed real estate firms are a less restrictive vehicle compared to the
REITs for indirect real estate investments, because these firms are not subject to the
mandatory 90% dividend distribution requirement for their earnings.12 However, with no
tax exemption granted at the corporate level, the listed real estate vehicle may not be the
most efficient structure for holding real estate. Putting aside the debate on whether listed
real estate firms or REITs are more efficient in the securitized real estate investment, this
paper attempted to test whether dividend policies of the listed real estate firms in
Singapore differ from the earlier findings of Wang, Erickson and Gau (1993) and
Bradley, Capozza and Seguin (1998) using REITs in the US.
12
The listed real estate vehicle is also not subject to the asset holdings rule imposed on REITs , which
requires REITs to have 70% of the income generated from real estate related assets. In Singapore,
REITs are also prohibited from participating in read estate development activities, and their borrowing
limit is capped at 35%. These are some of the restrictions that differentiate REITs from the listed real
estate vehicles.
13
The empirical results on US REITs were thus far inconclusive. Wang, Erickson and Gau
(1993) found than firms with higher debt-to-asset ratio are prone to agency problem. The
managers of these firms tend to pay out more dividends and simultaneously go to the
market to raise new capital, so that a more efficient and lower cost mechanism of
monitoring by the market can be installed. The agency cost hypothesis was, however,
rejected by Bradley, Capozza and Seguin (1998). They, instead, suggest that firms with
higher debt-asset ratio have more volatile cash flows in the future, and these firms will
have smaller dividend payouts to avoid being penalized by the market, when the dividend
policy can not be sustained in the future.
Do the managers of real estate firms in Singapore, which are not bounded by REITs rules
relating to dividend distributions and asset holdings, use dividend policy to reduce
agency costs in the firms? Our empirically results were more consistent with Wang,
Erickson and Gau (1993), which predict a positive relationship between firms’ debt-toasset ratio and dividend payouts. The dividend signaling of future cash flow volatility of
firms with higher leverage was not significant. The agency costs prediction was
differentiated by firms with higher dividend yields. Firm size was also not a good proxy
for cash flow volatility, and there were no significant signal by dividend policy of firms
with different market capitalization. Our results showed that firms with larger asset
portfolio tend to cut down dividend distributions, so as to retain more earnings for growth
and expansion purposes (Rozeff, 1982).
Our empirical results rejected the dividend irrelevance hypothesis of Miler and
Modigliani (1961). A perfect world with no tax and not transaction costs does not fit the
description of the indirect real estate market in Singapore. Dividend policy of the real
estate firms does matter in determining the stock price performance of the real estate
firms in Singapore. The value-penalty hypothesis of Bradley, Capozza and Seguin (1998)
was also significant in explaining the negative relationship between dividend reduction
and dividend payouts by the sample firms. Firms with constant dividend payouts were
also penalized with a 7.6% discount to the stock price compared to firms that distribute
higher dividends than the previous years.
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16
Table 4: Regression Results for the Dividend Payout Model
Pooled Regression Models
Model (2a)
Model 2(b)
Model (2c)
#
#
Coefficients
Coefficients
Coefficients#
Constant
Lagged period earnings
per share, Yi,t-1
Change in earnings per
share, ∆Yi,t
Firm Size, Ai,t
Debt to asset ratio, Li,t
0.3063***
(15.6534)
0.1373***
(6.1460)
-4.87E-06**
(-2.3885)
0.0384***
(3.6754)
Interactive variable,
DYi*Li
Fitted dividend
volatility, Z i ,t
Cross-section specific
effects@
Adjusted R2
0.2965***
(15.7076)
0.1421***
(6.6387)
-3.44E-06*
(-1.7345)
-0.0012
(-0.0867)
1.7898***
(4.0116)
0.2731***
(16.1910)
0.1199***
(5.7101)
0.7897***
(5.2386)
Xt
Xt
Xt
0.5301
0.5699
0.5631
Panel Regression Models
Model 2(d)
Model (2e)
Model (2f)
#
#
Coefficients
Coefficients
Coefficients#
0.0447***
0.0468***
0.0412***
(4.8652)
(5.3939)
(7.1734)
0.0474**
0.0278
0.0792***
(2.1389)
(1.3024)
(3.6332)
0.0335**
0.0350**
0.0511***
(2.1014)
(2.3296)
(2.9583)
-1.30E-06
1.51E-06
(0.6516)
(0.5440)
-0.0070
-0.0433**
(-0.3392)
(-2.0499)
1.2983***
(4.6092)
-0.2264
(-1.0136)
Fixed
Fixed
Fixed
0.8286
0.8206
The dividend per share, Di,t , is used as the dependent variable for the models.
# t-statistics are given in parentheses
@ the cross-section property stock return specific coefficients for different firms were not reported.
*** indicates 1% significance level
** indicates 5% significance level
* indicates 10% significance level
E-06 means the number is given in a multiple of 10-06.
17
Figure 1: Dividend Policy of Listed Real Estate Firms in Singapore (1992-2002)
0.40
5.00%
4.86%
Average Earnings Per Share
Average Dividend Yield
0.35
4.50%
3.50%
0.24
0.25
3.00%
2.60%
2.44%
0.20
2.50%
0.17
0.15
1.83%
0.15
0.13
0.11
0.10
0.05
0.00
0.09
1.51%
0.12
1.33%
1.59%
1.48% 1.42%
1.97%
0.13
1.73%
0.11
0.12
1.34%
0.07
2.00%
1.50%
Average Dividend Yield (%)
Average Earnings per Share (S$)
4.00%
0.30
1.00%
0.05
0.50%
0.00%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year
18