PurposeUnlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.Design/methodology/approachUsing a methodology similar to Rajan and Zingales, a sample of 119 listed REITs with different investment strategies and in different property sectors was analyzed. The analysis is carried out in order to determine the basic factors underpinning the capital structures by selecting financial items and ratios related with leverage (such as asset size, profitability ratios, tangibility of assets, growth opportunities, operating risk and geographical diversification of investments).FindingsResults show that REITs follow a pecking order theory of financing since more profitable firms are less levered and REITs with more growth opportunities have higher leverage ratios. The tangibility of assets turns out to be positively correlated with leverage, while REITs whose operating risk is high prefer a lower financial risk and consequently a lower gearing. Finally, it is not clear how size affects leverage decisions and more diversified REITs appear to be riskier.Originality/valueThe research also addresses the issue of asymmetric information and the debt‐equity choice for REITs sampled on the basis of their size, highlighting differences with other business sectors.

Given a firm's investment policy, its dividend policy is irrelevant (Miller and Modigliani (1961)). REITs, by law, pay at least 90 percent of their corporate income into dividends so their dividend policy is given. This is flipping of the dividend irrelevance theorem. Such a high dividend payment also means lower retained earnings so little free cash flow. Jensen (1986) argues lower free cash flow results in mitigated agency problems. In this paper, I ask 2 questions -first, how an average REIT, given its dividend policy, responds to its investment opportunities and second, if an average REIT (with mitigated agency problems) faces lower financing constraints. For the 1st question, I find that an average REITs investment responsiveness is higher than other firms. For the 2nd question, I find that an average REIT faces, in fact, higher financing constraints than other firms.2

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