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Is there a leverage target for REITs?

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  • Versmissen, J.
  • Zietz, J.

Abstract

The literature on capital structure shows no concensus on whether firms target a debt ratio and, if such a leverage target exists, at what speed firms close the gap between their actual and targeted debt ratio. This paper investigates whether there is a target debt ratio for Real Estate Investment Trusts (REITs) and to what extent such a target influences the financing decisions of REITs. Using different estimation methods and target specifications, we show that REITs do appear to adjust toward a target debt ratio. Our dynamic model specifications account for unobserved firm heterogeneity at the property type level and for the persistence of firms’ debt ratios over time. We identify relatively high adjustment rates of 50–60% per year, which indicate that a target debt ratio is of central importance for the corporate capital structure policies of REITs. The unique features of REITs, such as the minimum earnings payout ratio and the tangibility of their assets, likely contribute to a more active target debt behavior than that observed for other firms.

Suggested Citation

  • Versmissen, J. & Zietz, J., 2017. "Is there a leverage target for REITs?," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 57-69.
    • Handle: RePEc:eee:quaeco:v:66:y:2017:i:c:p:57-69
    DOI: 10.1016/j.qref.2017.01.001
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    2. Maziar Ghasemi & Nazrul Hisyam Ab Razak* & Komeil Dehghani, 2018. "Determinants of Debt Structure in Ace Market Bursa Malaysia: A Panel Data Analysis," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 390-395:6.
    3. Vishaal Baulkaran & Pawan Jain, 2023. "CDS contract initiations: REIT board monitoring and corporate decision outcomes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 217-246, February.
    4. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.
    5. Huerta-Sanchez, Daniel & Jafarinejad, Mohammad & Kim, Dongshin & Soyeh, Kenneth W., 2020. "Disentangling bubbles in equity REITs," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 357-367.

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    More about this item

    Keywords

    Capital structure; REITs; Target debt ratio; Panel data; Partial adjustment; System GMM;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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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