Using Option Market Liquidity to Predict REIT Leverage Changes

Posted: 6 Oct 2017 Last revised: 11 Oct 2017

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

John L. Glascock

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies; European Business School

Ran Lu-Andrews

California Lutheran University, School of Management

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: October 5, 2017

Abstract

Recent literature has shown that liquidity is important in explaining price effects for firms and firm decisions. For example, see Morellec (2001) and Bharath et al (2009). We follow and extend that literature by looking at the liquidity of market based options to forecast REIT capital structure changes. REITs, unlike typical listed firms, tend to have high leverage and a more dynamic capital structure because of regulation. Thus, understanding potential management behavior could be important to investors. By looking at actions of the managers as revealed through the liquidity in the option's market, we are able to estimate what REIT managers are likely to do in terms of future capital structure changes. We do so using option data which update at higher frequency than traditional accounting characteristics. Our results are similar to those of Borochin and Yang (2015) who study this issue for non-REIT firms. We find that REITs with higher historical volatility or lower option market liquidity (as measured by number of daily unique call options, daily call open interest, and daily volume of option traded0 are less likely to increase leverage in the following quarter. REITs with higher option liquidity or lower realized volatility are more likely to increase net long-term debt (issuing more debt or retire less debt) in the following quarter.

Keywords: Capital Structure; Real Estate; REITs; Options; Liquidity

Suggested Citation

Borochin, Paul and Glascock, John L. and Lu-Andrews, Ran and Yang, Jie, Using Option Market Liquidity to Predict REIT Leverage Changes (October 5, 2017). Journal of Real Estate Finance and Economics, Vol. 55, No. 2, 2017. Available at SSRN: https://ssrn.com/abstract=3048428

Paul Borochin

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

John L. Glascock

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

Storrs, CT 06269
United States

European Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Ran Lu-Andrews (Contact Author)

California Lutheran University, School of Management ( email )

60 W. Olsen Road
School of Management
Thousand Oaks, CA California 91360
United States

Jie Yang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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