Another Hunt for the Capital Structure Puzzle: Relationship of Leverage and Returns in the REIT Market

Since the evolutionary work of Modigliani and Miller (1958) financial researchers make desperate efforts about dynamics of capital structure - not mentioning a well-defined inference of leverage on returns. In the past decade this is also a concern for real estate research because most financial studies ignored the real estate market due to specific characteristics compared to other industries. But especially the analysis of REITs opens chances for consistent investigations thanks to their strict legislation and resulting homogeneity. A few studies about capital structure of REITs have been done so far. This paper follows the work of Giambona, Harding and Sirmans (2007) who confirmed Barclay, Marx and Smith¥s (2003) finding of the joint determination of debt and maturity. Beside Ooi, Ong and Li (2007) who used the Fama and French (1992) approach this is the second study which tries to specify an equation with returns of REITs as the depend variable and it is the first one including leverage as an explanatory variable. Hence using a system of equations this article investigates further issues of endogenity problems. In particular I connect returns with different aspects of debt regarding maturity or subordination which is of major interest for analysts and investors. Analyzing an unbalanced panel data set for US-REITs from the 1993 to 2008 period by employing a simultaneous equation model (SME) shall shed up light on the following aspects of the REIT industry: substitutive or complementary relationship of debt maturity and leverage, further endogenity problems of typical approximations used in empirical research like profitability or growth opportunities and finally inference about different measurements of leverage and returns.