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The Capital Structure Determinants of REITs: Is it a Peculiar Sector?

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  • Giacomo Morri
  • Christian Beretta

Abstract

Capital structure and financing decisions have been surveyed for years and, since Modigliani-Millerís proposition, much corporate finance literature has investigated this issue across different countries, industries and business cycles. Unlike previous studies that addressed capital structure decisions, this work focuses solely on the real estate sector in the United States in order to find out the main determinants that affect capital structures and financing decisions in this industry. The primary goal is to determine whether capital structure choices for property companies are related to factors similar to those appearing to affect capital structure decisions of public non real estate firms in other sectors. Using an approach similar to Rajan and Zingales (1995) who investigated the determinants of capital structures of public firms belonging to the G-7 countries, this work explores the financing choices of a sample of 112 listed Real Estate Investment Trusts (REITs), with different investment strategies and belonging to different property sectors, during the period 2002 to 2005. The evidence suggests that more profitable REITs tend to use less debt as predicted by the pecking order theory, specific intra-industry features, such as high collateral value of asset and law requirements of a large shareholdersí base or to pay out most of before tax income, are important determinants of financing decisions. REITs investing in residential real estate assets show unique characteristics that differentiate them from all the other property companies.

Suggested Citation

  • Giacomo Morri & Christian Beretta, 2007. "The Capital Structure Determinants of REITs: Is it a Peculiar Sector?," ERES eres2007_368, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2007_368
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2007-368
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    Cited by:

    1. Yunus Yasin Dogan & Chinmoy Ghosh & Milena Petrova, 2019. "On the Determinants of REIT Capital Structure: Evidence from around the World," The Journal of Real Estate Finance and Economics, Springer, vol. 59(2), pages 295-328, August.
    2. SOBIA Quayyoum & Szabó, Zoltán, 2015. "Leverage as a determinant of return on equity whether firm size moderate Leverage ?return on equity relationship," Proceedings of International Academic Conferences 2503654, International Institute of Social and Economic Sciences.
    3. Eli Beracha & Zifeng Feng & William Hardin, 2017. "The Operational Efficiency of REITs," ERES eres2017_50, European Real Estate Society (ERES).
    4. Duy Linh Nguyen & Wolfgang Breuer & Bertram Ingolf Steininger, 2018. "The REIT Debt Puzzle," ERES eres2018_77, European Real Estate Society (ERES).
    5. Yousef Ibrahim, 2019. "The Determinants of Capital Structure: Evidence from GCC and UK Real Estate Sectors," Real Estate Management and Valuation, Sciendo, vol. 27(2), pages 108-125, June.
    6. Iván Andrés Ordóñez-Castaño & Edila Eudemia Herrera-Rodríguez & Angélica María Franco Ricaurte & Luis Enrique Perdomo Mejía, 2021. "Voluntary Disclosure of GRI and CSR Environmental Criteria in Colombian Companies," Sustainability, MDPI, vol. 13(10), pages 1-18, May.

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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