The availability and use of credit have increased significantly over time due to economic growth and development, stronger institutional structures, increased financial innovation and integration, as well as firm-level considerations. Although many firms and households have delevered their balance sheets in response to the recent financial crisis, many governments, governmental agencies, and private sector firms, including public real estate firms, continue to maintain significant levels of debt. In fact, Green Street Advisors (2009), a prominent REIT buy-side analysis firm, has argued that REIT shareholder values would be enhanced by additional deleveraging. Ling and Naranjo (2013) and Ling, Naranjo, and Giacomini (2013) have recently shown that financial leverage affects firm-level returns in public real estate markets across a broad cross-section of countries. The authors also document that the additional returns earned by public real estate firms from financial leverage are, on average, not commensurate with the additional risks associated with the increased leverage. The recent financial crisis, during which credit markets froze and equity returns tumbled, provides further motivation to understand potential capital structure effects. In this research, we propose to examine U.S. REIT capital structure choices, the effects these corporate financial policy choices have on return performance, and the extent to which returns can be enhanced with modified leverage targets. The results of this research will also have important implications for equity holders of private real estate entities, which often make even greater use of leverage than publicly-traded real estate companies.
Capital Structure Matters: Leverage Effects on REIT Return Performance
GIACOMINI, EMANUELA;
2015-01-01
Abstract
The availability and use of credit have increased significantly over time due to economic growth and development, stronger institutional structures, increased financial innovation and integration, as well as firm-level considerations. Although many firms and households have delevered their balance sheets in response to the recent financial crisis, many governments, governmental agencies, and private sector firms, including public real estate firms, continue to maintain significant levels of debt. In fact, Green Street Advisors (2009), a prominent REIT buy-side analysis firm, has argued that REIT shareholder values would be enhanced by additional deleveraging. Ling and Naranjo (2013) and Ling, Naranjo, and Giacomini (2013) have recently shown that financial leverage affects firm-level returns in public real estate markets across a broad cross-section of countries. The authors also document that the additional returns earned by public real estate firms from financial leverage are, on average, not commensurate with the additional risks associated with the increased leverage. The recent financial crisis, during which credit markets froze and equity returns tumbled, provides further motivation to understand potential capital structure effects. In this research, we propose to examine U.S. REIT capital structure choices, the effects these corporate financial policy choices have on return performance, and the extent to which returns can be enhanced with modified leverage targets. The results of this research will also have important implications for equity holders of private real estate entities, which often make even greater use of leverage than publicly-traded real estate companies.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
