The Impact of Misvaluation on Financing Decisions: Evidence from the Real Estate Investment Trust (REIT) Sector

39 Pages Posted: 10 Jan 2020

See all articles by Linh Nguyen

Linh Nguyen

RWTH Aachen University - Department of Finance; Banking University Ho Chi Minh City

Bertram I. Steininger

Royal Institute of Technology (KTH)

Date Written: December 20, 2019

Abstract

We investigate the effects of misvaluation (defined as fluctuation in the market value of equity relative to its intrinsic value) on financing decisions of REITs (Real Estate Investment Trusts). Our findings reveal that misvaluation increases the likelihood of capital-increasing decisions (i.e., equity issues, debt issues and dual issues) and decreases the likelihood of capital-reducing decisions (i.e., equity repurchases and debt retirements). The impact of misvaluation on the equity-related decisions is consistent with market timing behaviour, whereas its impact on debt-related decisions is peculiar. Our further analyses document that due to exogenously capital constraints, highly misvalued REITs, which are motivated to undertake merger activities or new investments, issue both equity and debt financing because single equity capital might be insufficient to finance their new projects. In addition, the effects of misvaluation on debt-related decisions are different between REITs and non-real estate firms (non-REs).

Keywords: financial decision, misvaluation, Real Estate Investment Trust (REIT), market-to-book ratio, decomposing market-to-book model, residual income model

JEL Classification: G21, G32, G33

Suggested Citation

Nguyen, Linh D. and Steininger, Bertram I., The Impact of Misvaluation on Financing Decisions: Evidence from the Real Estate Investment Trust (REIT) Sector (December 20, 2019). Available at SSRN: https://ssrn.com/abstract=3507164 or http://dx.doi.org/10.2139/ssrn.3507164

Linh D. Nguyen (Contact Author)

RWTH Aachen University - Department of Finance ( email )

Templergraben 64
Aachen, 52056
Germany

Banking University Ho Chi Minh City ( email )

Ho Chi Minh City
Vietnam

Bertram I. Steininger

Royal Institute of Technology (KTH) ( email )

Stockholm
Sweden

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