Do investors value payout increases? Evidence from the Canadian income trust sector

Abstract

Investor response to changes in income trust payouts is measured using the implied cost of capital. As trust units are purchased primarily for the income stream, valuation using discounted cash flow models is appropriate and adverse responses to associated transaction costs are considered unlikely. The data reveal that investors in this sector do not reward the organization for payout growth explicitly; rather financing cost is reduced relative to the trust’s ability to fund an increase, similar to risk premiums in fixed income markets.