The Predictive Value of Tone for REIT Riskiness

Risk awareness generally increases during times of uncertainty. REITs’ riskiness has been known to be affected by its debt and capital structure decisions. We investigate if the text in REIT financial statements can improve the risk-related information environment by predicting credit behavior. Using a REIT-specific dictionary we extract the net positive tone from REIT financial statements from the first quarter of 1997 to the fourth quarter of 2017. We then use a panel VAR to assess whether the net positive REIT tone can predict credit variables such as leverage, cash and short term investments, unsecured debt and secured debt. In addition, we investigate the predictive value of tone for high and low growth firms based on its book-to-market value. Overall, our findings suggest that 1) REIT-specific tone predicts firm credit behavior and 2) firms differ in their reporting behavior based on their book-to-market value. Firms with profitable growth opportunities, characterized by a low book-to-market value, increase (decrease) leverage and decrease (increase) cash and short term investments following an increase (decrease) in the net positive tone. On the other hand, REITs with limited growth opportunities (high book-to-market value) display an inverse relationship between tone and leverage. Our study contributes to the literature on REIT text analysis specifically within the context of extracting risk related information. Furthermore, our study may have value for REIT practitioners including investors, analysts, financiers, and credit rating agencies who are sensitive to firm risk.