Secured Debt and Corporate Performance:Evidence from REITs

30 Pages Posted: 29 Jan 2010

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Shaun A. Bond

UQ Business School

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate

Date Written: January 28, 2010

Abstract

A number of competing theories have developed regarding the use of secured debt by firms. In adverse selection models, borrowers use collateral to signal quality, whilst moral hazard models assume that the use of collateral improves the incentives for borrowers to work hard to repay debt. In this paper, we empirically test these two competing theories. Specifically, we answer the following question: Does the use of secured debt result in a performance difference between firms that employ a higher proportion of secured debt versus firms that utilize unsecured debt? We find robust evidence that an increase in the use of secured debt by REITs is associated with positive excess returns in the following quarter. In addition, we observe that small REITs with high leverage are more likely to increase their secured debt ratio. Taken together, the results suggest that moral hazard models of collateral are more relevant in explaining the positive firm utilization of secured debt and future stock performance.

Keywords: REITs, Commercial Real Estate, Secured Debt, Performance

JEL Classification: R33, G32

Suggested Citation

Ambrose, Brent W. and Bond, Shaun Alexander and Ooi, Joseph T. L., Secured Debt and Corporate Performance:Evidence from REITs (January 28, 2010). Available at SSRN: https://ssrn.com/abstract=1543830 or http://dx.doi.org/10.2139/ssrn.1543830

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Shaun Alexander Bond

UQ Business School ( email )

The University of Queensland
Brisbane, QLD 4072
Australia

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

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