Debt Capacity of Real Estate Collateral

Real Estate Economics, Forthcoming

Posted: 7 Feb 2013

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Joseph H. Golec

University of Connecticut - Department of Finance

Armin Schwienbacher

SKEMA Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 6, 2013

Abstract

Real Estate Investment Trusts (REITs) pay no corporate taxes, yet surprisingly, their average leverage ratio is more than twice that of taxable firms (46% vs. 20%). We develop and test a model that helps explain this puzzle. The primary result of the model is that credit constrained firms' assets tangibility is positively related to their leverage. We test the relation on a large sample of COMPUSTAT firms because they invest in both real estate and other tangible assets. We find a significant positive relation between tangibility and leverage, which is strongest for real estate collateral (land & building). Furthermore, we find that the relation holds only for credit constrained firms, consistent with our theoretical prediction. The implication is that, compared to other assets like machinery, real estate can improve a firm's borrowing capacity, therefore, knowing the composition of a firm's tangible assets is important in understanding its leverage.

Keywords: land & building, machinery & equipment, leverage, credit constraints

Suggested Citation

Giambona, Erasmo and Golec, Joseph and Schwienbacher, Armin, Debt Capacity of Real Estate Collateral (February 6, 2013). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2212766

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 640
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

HOME PAGE: http://sites.google.com/view/armin-schwienbacher

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