REIT Liquidity Management and Institutional Investors

We examine how institutional investors influence the liquidity choice between cash versus bank credit lines of the Real Estate Investment Trusts (REITs). While cash offers REIT managers unconditional control rights, credit lines subject managers to bank monitoring and restrictive covenants. We find that REITs use more bank credit lines relative to cash under the oversight of institutional investors, especially independent and long-term institutions. These findings suggest that institutional investors attenuate the REIT managers’ propensity to keep excessive cash relative to credit lines. Moreover, because banks have competitive advantages in screening and monitoring borrowers, institutional investors delegate more agency monitoring to banks when their holding REITs face more severe information and agency problems, and are more likely to take excessive risk.