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The Impact of Under-Pricing of Default Risk on Investment: Evidence from Real Estate Investment Trusts (REITs)

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  • Linh D. Nguyen
  • Bertram Steininger

Abstract

Under-pricing the default risk is inevitable in a market with many lenders. Our study examines the impact of under-priced default risk on investment in the REIT sector where firms’ investment is highly sensitive to changes in credit market conditions. We find that REITs exploiting under-priced default risk have a higher level of investment than REITs that do not because the former could obtain access to loans having low rates of interest. In addition, REITs prioritize the choice of investment over the leverage choice. In contrast, we find evidence that under-priced default risk does not have a significant impact on non-REITs’ investment while their leverage does because non-REITs desire to reduce costs of financial distress.

Suggested Citation

  • Linh D. Nguyen & Bertram Steininger, 2019. "The Impact of Under-Pricing of Default Risk on Investment: Evidence from Real Estate Investment Trusts (REITs)," ERES eres2019_288, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2019_288
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    More about this item

    Keywords

    Default risk; Investment; real estate investment trust (REIT); under-pricing of default risk;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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