Dividend policy and cash-flow uncertainty

We explore the role of expected cash-flow volatility as a determinant of dividend policy both theoretically and empirically. Our simple one-period model demonstrates that, given the existence of a stock-price penalty associated with dividend cuts, managers rationally pay out lower levels of dividends when future cash flows are less certain. The empirical results use a sample of REITs from 1985 to 1992 and confirm that payout ratios are lower for firms with higher expected cash-flow volatility as measured by leverage, size and property-level diversification. These results are consistent with information-based explanations of dividend policy but not with agency-cost theories.