The Capital Structure Determinants of REITs: Is it a Peculiar Sector?

Giacomo Morri and Christian Beretta

ERES from European Real Estate Society (ERES)

Abstract: Capital structure and financing decisions have been surveyed for years and, since Modigliani-Millerís proposition, much corporate finance literature has investigated this issue across different countries, industries and business cycles. Unlike previous studies that addressed capital structure decisions, this work focuses solely on the real estate sector in the United States in order to find out the main determinants that affect capital structures and financing decisions in this industry. The primary goal is to determine whether capital structure choices for property companies are related to factors similar to those appearing to affect capital structure decisions of public non real estate firms in other sectors. Using an approach similar to Rajan and Zingales (1995) who investigated the determinants of capital structures of public firms belonging to the G-7 countries, this work explores the financing choices of a sample of 112 listed Real Estate Investment Trusts (REITs), with different investment strategies and belonging to different property sectors, during the period 2002 to 2005. The evidence suggests that more profitable REITs tend to use less debt as predicted by the pecking order theory, specific intra-industry features, such as high collateral value of asset and law requirements of a large shareholdersí base or to pay out most of before tax income, are important determinants of financing decisions. REITs investing in residential real estate assets show unique characteristics that differentiate them from all the other property companies.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2007-01-01
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Citations: View citations in EconPapers (6)

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