Demand for Dividends: The Case of UK Water Companies

High levels of investment in relation to cash flows, combined with high dividend payouts, have caused UK water companies persistently to borrow to meet their cash outflows. This behaviour is not adequately explained by mainstream theories of dividends. The intensive regulatory environment has meant that agency costs and information asymmetry are low, and there has been no clear tax motive for the companies regular dividends. It is argued that the large regular dividends are explained primarily by a demand for dividends on the part of investors, and that there are institutional or behavioural reasons for the demand.