Financial Flexibility and Manager-Shareholder Conflict: Evidence from REITs

Abstract

We show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower and more stable leverage outcomes. We then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. Our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm’s debt capacity to enhance financial flexibility.