Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act

Review of Corporate Finance, 2022

44 Pages Posted: 8 Nov 2022 Last revised: 10 Nov 2022

See all articles by Manish Gupta

Manish Gupta

Nottingham University Business School

Date Written: November 30, 2021

Abstract

I examine the relationship between the availability of internal funds and the corporate decisions of firms with tangible assets. In the presence of frictions, a wedge exists between the costs of internal and external funds. Firms with collateral, such as real estate investment trusts (REITs), might face limited financing constraints for investment; however, changes in internal funds might still affect their corporate decisions other than investment, such as financing decisions and liquidity demand. The REIT Modernization Act of 2001 (RMA) lowered REITs' payout threshold from 95% to 90%, which represents a positive shock to internal funds. I find that, first, REITs lowered their dividend payout in response to the shock, which implies an increase in their internal funds, and second, while the shock did not affect REITs' investment or liquidity demand, it did reduce their additional security issuance and leverage. The results remain robust to a battery of additional empirical tests.

Keywords: Asset Tangibility, Cash Flow Sensitivity, Cash Flow Shocks, Leverage

JEL Classification: G31

Suggested Citation

Gupta, Manish, Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act (November 30, 2021). Review of Corporate Finance, 2022, Available at SSRN: https://ssrn.com/abstract=3907208

Manish Gupta (Contact Author)

Nottingham University Business School ( email )

University of Nottingham
Jubilee Campus
Nottingham, NG8 1BB
United Kingdom

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