The Impact of Underpricing of the Default Risk on Investment: Evidence from Real Estate Investment Trusts (REITs)

Abstract

This study examines the impact of under-priced default risk on investment in the real estate investment trust (REIT) sector, where firms’ investment is highly sensitive to changes in credit market conditions. The findings reveal that REITs exploiting under-priced default risk have a higher level of investment than their peers because the former can access low-cost capital. Moreover, exploiting the under-priced default risk is specific to not only REITs but also to the whole real estate investment sector. In contrast, under-priced default risk has an insignificant impact on investment of non-real estate firms because non-recourse loans are unpopular in these firms.

Keywords: default risk, investment, real estate investment trust (REIT), under-pricing of the default risk

JEL Classification: G21, G32