The Impact of Misvaluation in the REIT Sector

Abstract

By using the decomposing market-to-book model and the residual income model to estimate misvaluation, we find empirical evidence supporting the proposition that misvaluation has an impact on the financing decisions and liquidity management of REITs. Regarding the financing decisions, REITs experiencing a high increase in their stock prices will tend to increase their equity to exploit the low cost of capital relative to other financing forms. In addition, REITs are also more likely to increase debt issuances when their misvaluation is higher because overvalued REITs generally have easier access to debt. Finally, REITs use more cash than bank credit lines in liquidity management when they experience a misvaluation.