Business Commons^™

The Consequences Of Reit Index Membership For Return Patterns, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

We study the impact of S&P index membership on REIT stock returns. Given the hybrid nature of REITs, their returns may become more like those of other indexed stocks and less like those of their underlying properties. The existing literature does not offer clear predictions on these potential outcomes. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns after controlling for the stock characteristics that determine index membership. We also document that index membership enhances the link between REIT stock returns and …

Leverage, Volatile Future Earnings Growth And Expected Stock Returns, Jamie Alcock, Eva Steiner, Kelvin Jui Keng Tan

Eva Steiner

We provide theory and evidence to complement Choi's [RFS, 2013] important new insights on the returns to equity in `value' firms. We show that higher future earnings growth ameliorates the value-reducing effect of leverage and, because the market for earnings is incomplete, reduces the earnings-risk sensitivity of the default option. Ceteris paribus, a levered firm with low (high) earnings growth is more sensitive to the first (second) of these effects thus generating higher (lower) expected returns. We demonstrate this by modeling equity as an Asian-style call option on net earnings and find significant empirical support for our hypotheses.

Reit Capital Structure Choices: Preparation Matters, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

Sun, Titman, and Twite (2015) find that capital structure risks, namely high leverage and a high share of short-term debt, reduced the cumulative total return of US REITs in the 2007-2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006, was associated with a significantly higher cumulative total return 2007-2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross-sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those …

Financial Flexibility And Manager-Shareholder Conflict: Evidence From Reits, Timothy Riddiough, Eva Steiner

Eva Steiner

We show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower and more stable leverage outcomes. We then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. Our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm’s debt capacity to enhance financial flexibility.

Manipulation In U.S. Reit Investment Performance Evaluation: Empirical Evidence, Jamie Alcock, John Glascock, Eva Steiner

Eva Steiner

We investigate whether Real Estate Investment Trust (REIT) managers actively manipulate performance measures in spite of the strict regulation under the REIT regime. We provide empirical evidence that is consistent with this hypothesis. Specifically, manipulation strategies may rely on the opportunistic use of leverage. However, manipulation does not appear to be uniform across REIT sectors and seems to become more common as the level of competition in the underlying property sector increases. We employ a set of commonly used traditional performance measures and a recently developed manipulation-proof measure (MPPM, Goetzmann, Ingersoll, Spiegel, and Welch (2007)) to evaluate the performance of …

Macroeconomic Risk Factors And The Role Of Mispriced Credit In The Returns From International Real Estate Securities, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

The benefits of diversification from international real estate securities are generally well established. However, the drivers of international real estate securities returns are insufficiently understood. We jointly examine the empirical implications of three major international asset pricing models that account for broad macroeconomic risk factors. In addition, we develop the hypothesis that an indicator of mispriced credit is significant in explaining the time series variation in international real estate securities returns. We employ the returns generated by a large sample of firms from 20 countries over the period 1999 to 2011 to test our hypothesis. We find support for the …

Joint Leverage And Maturity Choices In Real Estate Firms: The Role Of The Reit Status, Jamie T. Alcock, Eva Steiner, Kelvin J. K. Tan

Eva Steiner

We explore the interdependence of leverage and debt maturity choices in Real Estate Investment Trusts (REITs) and unregulated listed real estate investment companies in the U.S. for the period 1973-2011. We find that the leverage and maturity choices of all listed real estate firms are interdependent, but in contrast to industrial firms, they are not made simultaneously. Across the different types of real estate firms considered, we find substantial differences in the nature of the relationship between leverage and maturity. Leverage determines maturity in non-REITs, whereas maturity is a determinant of leverage in REITs. We suggest that the observed differences …

The Interrelationships Between Reit Capital Structure And Investment, Jamie Alcock, Eva Steiner

Eva Steiner