Creditworthiness or Management Signal? An Empirical Investigation of Loan Commitments Obtained by Non-Taxable Firms

Abstract

Market reaction to the announcement of obtaining loan commitments is examined for a unique sample of tax-exempt real estate investment trusts (REITs). Debt-interest tax incentives may be ruled out on a theoretical basis and empirically due to a significant positive market reaction. Thus, evidence is developed to differentiate between two signaling-effect explanations. The analysis supports the hypothesis that management procures loan commitments to undertake new real estate investments. This action is interpreted by the market as a signal of management's superior information regarding the REIT's true equity value.

Keywords: loan commitments, signaling effect, REITs, tax-exempt firms

JEL Classification: C32, C43, G12