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The impact of underpricing of the default risk on investment: Evidence from Real Estate Investment Trusts (REITs)

Author

Listed:
  • Nguyen, Linh D.

    (RWTH Aachen University)

  • Steininger, Bertram

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

This study examines the impact of underpriced default risk on investment in the real estate investment trust (REIT) sector, where firms’ investment is highly sensitive to changes in credit market conditions. The findings reveal that REITs exploiting underpriced default risk have a higher level of investment than their peers because the former can access low-cost capital. Moreover, exploiting the underpriced default risk is specific to not only REITs but also to the whole real estate investment sector. In contrast, underpriced default risk has an insignificant impact on investment of non-real estate firms because non-recourse loans are unpopular in these firms.

Suggested Citation

  • Nguyen, Linh D. & Steininger, Bertram, 2019. "The impact of underpricing of the default risk on investment: Evidence from Real Estate Investment Trusts (REITs)," Working Paper Series 19/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2019_005
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    More about this item

    Keywords

    default risk; investment; real estate investment trusts (REITs); underpricing of the default risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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