REIT Capital Structure Choices: Preparation Matters

Abstract

Sun, Titman and Twite find that capital structure risks, namely, high leverage and a high share of short‐term debt, reduced the cumulative total return of U.S. REITs in the 2007–2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006 was associated with a significantly higher cumulative total return 2007–2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross‐sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk‐reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis.

Institutional common ownership and firm value: Evidence from real estate investment trusts

“…Chen, Li, and Ng (2018) study conventional firms and find that ICO enhances access to external financing and thereby increases investment opportunities. Pavlov, Steiner, and Wachter (2018) suggest that REIT managers are able to improve firm value by the financing choices they make in anticipation of future risks. However, the estimated coefficients on Treat × Post in the INT/TA and FINANCING regressions (columns [8] and [9]) are both statistically insignificant.…”

The impact of financial flexibility on capital structure decisions: Some empirical evidence

“…Byoun (2007) defines financial flexibility as the degree of capacity and speed that a company can provide the resources required for defensive (payback) and aggressive (investment) responses to increase company value. Financial flexibility can be defined as the ability of companies to reallocate cash flows between bonds and shareholders over time to better match operational risk and create long-term value (Pavlov et al, 2018).…”

Financial Flexibility and Investment: Evidence from REIT At‐the‐Market (ATM) Equity Offerings

“…Pavlov, Steiner and Wachter () provide evidence of REITs adjusting their capital structure by reducing leverage and extending debt maturity prior to the financial crisis in order to mitigate future capital structure risks.…”

“…Pavlov, Steiner and Wachter (2018) provide evidence of REITs adjusting their capital structure by reducing leverage and extending debt maturity prior to the financial crisis in order to mitigate future capital structure risks.25 As an additional robustness check, we utilize a 2SLS model similar to that reported inTable B.1 of the Internet Appendix in which we replace REINV with LEV and continue to document a significant relation between ATM program use and subsequent leverage.…”