The objective of this study is to examine how sharia-compliance mitigates the agency cost of free cash flow by using dividend policy in the context of firms listed on Gulf Co-operation Council (GCC) country stock exchanges. The study applies a panel regression to a data set composed of 1242 observations from 207 companies during the period 2009-2014. The results show that sharia-compliant firms not only have higher payout ratios but also have higher likelihood to pay dividends. Moreover, consistent with avoidance of the free cash flow problem, the results reveal that the dividend payments of sharia-compliant companies respond more strongly to free cash flow than do the dividend payments of non-sharia-compliant companies. Likewise, Sharia-compliant companies are likely to pay out more of their free cash flow than non-sharia-compliant companies, which can prevent managers from misusing the resources in ways that may not maximize shareholder wealth.