Dividend Policy and Corporate Monitoring: Evidence from the Regulated Electric Utility Industry

The payment of dividends imposes costs on the firm's shareholders in the form of higher taxes (relative to capital gains) and issuance costs arising from the dividend-induced need to acquire external equity, given the firm's investment and capital structure policies. Why, then, do firms pay dividends? In particular, why do the more capital intensive electric utilities have a dividend payout rate more than twice that of industrial firms? In simpler terms, why are utilities among the largest suppliers of dividends and simultaneously among the largest sellers of common stock? In this study, we provide some possible insights into the larger dividend puzzle through an empirical investigation of the seemingly extraordinary dividend payout policies of regulated electric utilities.