Renal sodium and water retention and plasma volume expansion have been shown to precede ascites formation in experimental cirrhosis. The classical "underfilling" theory, in which ascites formation causes hypovolemia and initiates secondary renal sodium and water retention, thus seems unlikely. While the occurrence of primary renal sodium and water retention and plasma volume expansion prior to ascites formation favors the "overflow" hypothesis, the stimulation of the renin-angiotensin-aldosterone system, vasopressin release and sympathetic nervous system associated with cirrhosis is not consonant with primary volume expansion. In this present article, the "Peripheral Arterial Vasodilation Hypothesis" is proposed as the initiator of sodium and water retention in cirrhosis. Peripheral arterial vasodilation is one of the earliest observations in the cirrhotic patient and experimental animals with cirrhosis. Arterial vasodilators and arteriovenous fistula are other examples in which renal sodium and water retention occur secondary to a decreased filling of the arterial vascular tree. An increase in cardiac output and hormonal stimulation are common features of cirrhosis, arteriovenous fistula and drug-induced peripheral arterial vasodilation. However, a predilection for the retained sodium and water to transudate into the abdominal cavity occurs with cirrhosis because of the presence of portal hypertension. The Peripheral Arterial Vasodilation Hypothesis also explains the continuum from compensated to decompensated cirrhosis to the hepatorenal syndrome.