The Impact of Misvaluation on REITs’ Liquidity Management

Abstract

Using three different approaches to measure misvaluation, we analyse the impact of misvaluation on liquidity management of REITs. Our analysis reveals that misvaluation increases cash holdings because misvaluated REITs issue new equity to low costs of equity. In addition, REITs with higher misvaluation are more likely to establish a bank credit line and receive higher capacity of credit lines because they want to quickly finance acquisitions. Finally, we find that the share of the bank credit line component relative to the cash component in the total liquidity increases with the increase in misvaluation. Taken together, our results suggest that misvaluation has a significant impact on liquidity management in the REIT sector.

Keywords: liquidity management; misvaluation; Real Estate Investment Trust (REIT); market-to-book model; residual income model; decomposing market-to-book model

JEL Classification: G21, G32, G33