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Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act

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  • Manish Gupta

Abstract

I examine the relationship between the availability of internal funds and the corporate decisions of firms with tangible assets. In the presence of frictions, a wedge exists between the costs of internal and external funds. Firms with collateral, such as real estate investment trusts (REITs), might face limited financing constraints for investment; however, changes in internal funds might still affect their corporate decisions other than investment, such as financing decisions and liquidity demand. The REIT Modernization Act of 2001 (RMA) lowered REITs’ payout threshold from 95% to 90%, which represents a positive shock to internal funds. I find that, first, REITs lowered their dividend payout in response to the shock, which implies an increase in their internal funds, and second, while the shock did not affect REITs’ investment or liquidity demand, it did reduce their additional security issuance and leverage. The results remain robust to a battery of additional empirical tests.

Suggested Citation

  • Manish Gupta, 2022. "Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act," Review of Corporate Finance, now publishers, vol. 2(2), pages 393-426, May.
    • Handle: RePEc:now:jnlrcf:114.00000018
    DOI: 10.1561/114.00000018
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    Cited by:

    1. Jianfu Shen & Kwong Wing Chau, 2022. "The Effect of Access to the Public Debt Market on Corporate Financing Decisions: The Case of REITs," Sustainability, MDPI, vol. 14(13), pages 1-19, June.
    2. Paul Anglin & Jianxin Cui & Yanmin Gao & Li Zhang, 2021. "Analyst Forecasts during the COVID-19 Pandemic: Evidence from REITs," JRFM, MDPI, vol. 14(10), pages 1-21, September.

    More about this item

    Keywords

    Asset tangibility; cash flow sensitivity; cash flow shocks; leverage;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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