Thin Market, Managerial Entrenchment and Capital Structure Decisions of Asian REITs

The aim of this research is to investigate the effects of the different managerial structures on the capital structure choice and financing decisions in thin real estate markets such as Asian REITs market. Asian REITs operate in different market environment than its US and Europe counterparts. A thin market, different ownership and managerial structures are some attributes of this market. Most of Asian REITs still adopt an externally managed strategy. This separation of ownership leads to agency conflict and higher information asymmetry. A thin market, in addition, is associated with fewer trading transactions, illiquid and higher volatility. This paper set sights to observe how the different managerial forms of REITs impact on its capital structure decisions in a thin market environment. It will also examine the relevance of the existing capital structure theories in explaining the financing decisions of the two different REIT managerial structures after the consideration of the existence of the free cash flow. Factors that are tested include the firms attributes (e.g. market volatility), leverage factors (e.g. profitability) and capital raising factors. Residual income approach is used to investigate the level of free cash flow. Standard OLS regression is applied to show the significance of the factors. Multinomial Logistic (MNL) regression is used to show the relevance of the capital structure theory. These regression analyses are carried out across Asian REITs from period 2006-2010. Past results seem to show that now REITs in general tends to adapt market timing behavior capital structure theory.