An Analysis of REIT Security Issuance Decisions

This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and gr...

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Bibliographic Details
Published in:Real estate economics 2010-03, Vol.38 (1), p.91-120
Main Authors: Boudry, Walter I., Kallberg, Jarl G., Liu, Crocker H.
Format: Article
Language:English
Subjects:
Capital structure
Decision making
Equity
Market timing
Rates of return
REITs
Studies
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Summary:This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and growth, a REIT is more likely to issue equity when its price‐to–net asset value ratio is high. This suggests that REITs issue equity in public markets when the cost of equity capital is lower in the public market than in the private market. Consistent with traditional market timing, REITs are more likely to issue equity after experiencing large price increases. We also find some support for REITs following the trade‐off theory of capital structure. REITs are less likely to issue debt when proxies for expected bankruptcy costs are high.
ISSN:1080-8620
1540-6229
DOI:10.1111/j.1540-6229.2009.00255.x