Equity vs debt financing of REITs: a survey of determinants of the security issue decision

Abstract

AbstractThis study examines the determinants of the security issue decision for Real Estate Investment Trusts (REITs) for a sample of 664 REIT security issuances in the 1993–2001 period. REITs differ from industrial companies because they are sheltered from paying corporate income taxes if they pay out 95 per cent of income as dividends. This restriction forces REITs to use the external markets to raise capital more often than their industrial counterparts. For these reasons, REITs might have different incentives to issue debt versus equity than has been previously found for industrials. The results of the study find that the decision to issue equity is directly related to the expected cost of issuing debt and inversely related to the costs of issuing equity. Investment opportunities are not related to the security issue decision. These results are consistent with the pecking order hypothesis, which differs from previously examined industrial companies where the security issue decision was driven by agency costs. Copyright © 2003 Henry Stewart Publications