REIT Capital Structure Choices: Preparation Matters
Pavlov, Andrey; Steiner, Eva; Wachter, Susan
Sun, Titman, and Twite (2015) find that capital structure risks, namely high leverage and a high share of short-term debt, reduced the cumulative total return of US REITs in the 2007-2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006, was associated with a significantly higher cumulative total return 2007-2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross-sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk-reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis.
real estate investment; leverage; financial crisis
Required Publisher Statement: © Wiley. This is the pre-peer reviewed version of the following article: Pavlov, A., Steiner, E. & Wachter, S. (2016). REIT capital structure choices: Preparation matters. Real Estate Economics. doi: 10.1111/1540-6229.12155. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.