On the Capital Structure of Real Estate Investment Trusts (Reits)

Posted: 18 Aug 2006

See all articles by Zhilan Feng

Zhilan Feng

Union College

Chinmoy Ghosh

University of Connecticut - Department of Finance

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Abstract

Much of the literature on capital structure excludes Real Estate Investment Trusts (REITs) due mainly to the unique regulatory environment of these firms. As such, the issue of how REITs choose among different financing options when they raise external capital is largely unexplored. In this paper, we explore two issues on the capital structure of REITs: is there a relationship between market-to-book and leverage ratios, and, is the relationship between market-to-book and leverage ratio temporary or persistent. Our results suggest that REITs with historically high market-to-book ratio tend to have persistently high leverage ratio. In essence, REITs with high growth opportunity and high market valuation raise funds through debt issues. This finding, which is robust to various specifications and econometric tests, is contrary to the financing decisions of non-regulated firms. We attribute it to the special regulatory environment of REITs where, despite no apparent benefits to debt financing, management issues debt.

Keywords: REITs, capital structure, IPO, leverage ratio

Suggested Citation

Feng, Zhilan and Ghosh, Chinmoy and Sirmans, C. F., On the Capital Structure of Real Estate Investment Trusts (Reits). Journal of Real Estate Finance and Economics, Vol. 34, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=924915

Zhilan Feng (Contact Author)

Union College ( email )

Schenectady, NY 12308-3151
United States

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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