The Capital Structure Decision for Listed Real Estate Companies

Abstract:     
The two main theories of capital structure are tested on a sample of 18 UK listed real estate companies, over a seven year period to 2004. Using dynamic specifications of the models inferences about firm financing behaviour can be made. Specifically: (1) Where firms turn to external financing, debt constitutes the majority of securities issued. Debt issuance tracks the need for external finance closely, and is robust to periods when firms run financing 'surpluses' - debt is paid down during these periods. (2) The pecking order specification dominates the trade-off theory in a direct comparison of the dynamic models. The power of this result is much higher than any previous studies. Real estate financing appears to sit comfortably as part of a broader capital structure framework in which information asymmetries drive firm financing behaviour.

Keywords: Capital structure, pecking order, trade off theory, property companies, real estate.

JEL Classifications: G32, R33

Working Paper Series