REIT Capital Budgeting and Equity Marginal q

Equity marginal  q  is the change in the market value of a company's equity in response to a one-unit unexpected change in its asset base. Hence, it is a profitability index that evaluates a firm's capital budgeting decisions at the margin. We estimate the equity marginal  q  for real estate–managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class. Using the universe of equity REITs for the period from 1993 to 2005, we find that REITs with greater idiosyncratic volatility, higher stock turnover and smaller bid-ask spread have a higher equity marginal  q . In addition, both the holdings of institutional investors and their investment horizons are respectively positively related to equity marginal  q.  With these firm characteristics taken into account, firm size is found to be negatively related to equity marginal  q . Our findings are economically important as well, because the equity marginal  q  ratio alone accounts for approximately one-third of the total REIT shareholder wealth change during the study period.     

Firm entry and firm growth

This paper reports on the importance of firm entry and growth flows in Portuguese manufacturing during the period 1982–86, and investigates their determinants. We find that both movements are induced by past profitability and deterred by economies of scale, product differentiation and sunk costs. The analysis does not reject the hypothesis that the determinants of firm entry and growth are quantitatively the same, thereby giving some support to the hypothesis that entry and expansion are close substitutes in absorbing industry excess profits, and that the choice between them does not depend on the height of the entry/mobility barriers.     

An Analysis of REIT Security Issuance Decisions

This article tests the ability of traditional capital structure theories to explain the issuance decisions of real estate investment trusts (REITs). For issuances made between 1997 and 2006, we find strong support for the market timing theory of capital structure. Controlling for past returns and growth, a REIT is more likely to issue equity when its price-to–net asset value ratio is high. This suggests that REITs issue equity in public markets when the cost of equity capital is lower in the public market than in the private market. Consistent with traditional market timing, REITs are more likely to issue equity after experiencing large price increases. We also find some support for REITs following the trade-off theory of capital structure. REITs are less likely to issue debt when proxies for expected bankruptcy costs are high.     

Further Evidence on the Capital Structure of REITs

This study examines the determinants of real estate investment trust (REIT) capital structure decisions from 1990 to 2008. Using a broad sample of 2,409 firm‐year observations, we find that asset tangibility is positively related to leverage, whereas profitability and market‐to‐book ratios are negatively related. Additional evidence suggests that firm debt capacity varies systematically with the unique operating and financing mechanisms employed by REITs. These results are robust across both aggregate firm debt levels and marginal security issuance decisions. Finally, our results provide further insight into competing capital structure theories, generally supporting empirical predictions derived from the market timing and trade‐off theories, although failing to support pecking order theory predictions.     

REIT Auditor Fees and Financial Market Transparency

This article examines the relationship between overinvestment in audit services, abnormal nonaudit fees paid to the auditor and market-based measures of firm transparency. Because real estate investment trusts (REITs) must distribute 90% of their earnings as dividends, many are repeat participants in the seasoned equity market. Thus, REITs have unusually strong incentives to strive for security market transparency. We find that the capital markets reward REITs that overinvest in audit services with better liquidity as measured by bid-ask spreads. However, firms with abnormally high nonaudit expenditures appear to be penalized with wider spreads, consistent with the notion that such fees may compromise auditor independence.     

Banking Relationships and REIT Capital Structure

This article examines the evolution of real estate investment trust (REIT) capital structure in the new REIT era with a focus on the effects of banking relationships on REIT capital structure. Using a unique sample of REITs from 1992 to 2003, we find that, after controlling for firm characteristics, REITs with banking relationships are more likely to obtain long‐term debt ratings and subsequently issue public debt. Moreover, REITs with banking relationships tend to use less secured debt and have lower leverage. These findings support the notion that banking relationships facilitate REITs' access to the public debt markets and help explain why REITs shift from traditional mortgage financing to bank debt and public capital market financing. The results also support the proposition that firm leverage should be positively related to the amount of a firm's secured debt.     

Does Microelectronics Reduce Economies of Scale? A Case Study in the Turkish Chemical Industry

This paper delves into the question of how new technologies affect economies of scale at the empirical level. As theoretical studies are inconclusive, we introduce a case study in the Turkish chemical industry to observe the dynamics of the relationship between technology and economies of scale. By observing the changes in the sources of economies of scale, output and unit costs in our case study firms, we showed that while economies of product scale stayed stable, both economies of plant and firm scales increased in the chemical industry.     

Strategy and environment as determinants of performance: Evidence from the Japanese machine tool industry

This study examines the roles played by the environment and realized strategies on firm-level performance in the Japanese machine tool industry. We examine the effect of environment and strategy on performance using longitudinal data on a sample of 25 Japanese machine tool firms over the period 1979-92. Our results indicate that both firm strategies and the environment play significant roles in influencing profitability and growth. More specifically, whereas both strategy and environmental variables are significantly related to firm profitability, only environmental variables are associated with firm growth. Additionally, in contrast to U.S. based studies, we find that capital expenditures and technological change are not negatively associated with profitability. Rather technological change has a positive impact on firm growth. We discuss the implications of these results for strategic management and provide suggestions for future research.     

Elective Stock Dividends and REITs: Evidence from the Financial Crisis

In response to the recent financial crisis, the U.S. Government introduced new rules which allow Real Estate Investment Trusts (REITs) to issue elective stock dividends (ESDs), i.e., noncash dividends, to satisfy their distribution requirements. The purported goal of these rules was to provide temporary relief to REITs facing cash flow problems. We investigate how the introduction of these rules affects dividend policy of REITs. Surprisingly, we document that only 17 REITs chose to issue elective stock dividends. We examine the characteristics of these REITs and find that their cash flows are similar to REITs that do not select these dividends. This suggests that cash flow problems are unlikely to be the primary determinant of the ESD issuance decision. Instead, our findings indicate the decision to pay ESDs is related to the level of loans that are close to maturity, REIT size, growth prospects and poor performance during the financial crisis. Furthermore, we find that the same factors determine the ratio, amount and frequency of stock dividends issued by these REITs. We also examine the response of shareholders to ESDs announcements and find positive abnormal returns surrounding these dividend announcements.     

Estimating the performance effects of business groups in emerging markets

Business groups—confederations of legally independent firms—are ubiquitous in emerging economies, yet very little is known about their effects on the performance of affiliated firms. We conceive of business groups as responses to market failures and high transaction costs. In doing so, we develop hypotheses about the effects of group affiliation on firm profitability: affiliation could either boost or depress firm profitability, and members of a group are likely to earn rates of return similar to other members of the same group. Using a unique data set compiled largely from local sources, we test for these effects in 14 emerging markets: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey. We find evidence that business groups indeed affect the broad patterns of economic performance in 12 of the markets we examine. Group affiliation appears to have as profound an effect on profitability as does industry membership, yet strategy scholars have a much clearer grasp of industries than of groups. Moreover, membership in a group raises the profitability of the average group member in several of the markets we examine. This runs contrary to the wisdom, conventional in advanced economies, that unrelated diversification depresses profitability. Overall, our findings suggest that the roots of sustained differences in profitability may vary across institutional contexts; conclusions drawn in one context may well not apply to another. Copyright © 2001 John Wiley & Sons, Ltd.     

Predictability in Equilibrium: The Price Dynamics of Real Estate Investment Trusts

This research hypothesizes that, in markets where information costs, transaction costs and the economic impact of information can vary widely, we should expect predictability to vary systematically. We test this hypothesis with data on equity real estate investment trusts (REITs) from 1985 to 1992. We document that levels of predictability vary with firm characteristics like leverage, size and focus. Momentum is stronger for larger, more levered REITs. Reversion is faster for focused, levered REITs. The results are consistent with the hypothesis that, in equilibrium, securities, where information is either less costly to acquire or has less impact on fundamental value, should exhibit less predictability.     

The effect of CEO pay deviations on CEO withdrawal,firm size,and firm profits

We build upon previous work on the effects of deviations in CEO pay from labor markets to assess how overcompensation or undercompensation affects subsequent voluntary CEO withdrawal, firm size, and firm profitability, taking into account the moderating effect of firm ownership structure. We find that CEO underpayment is related to changes in firm size and CEO withdrawal, and that the relationship between CEO underpayment and CEO withdrawal is stronger in owner‐controlled firms. We also show that when CEOs are overpaid, there is higher firm profitability; a relationship that is weaker among manager‐controlled firms. We then discuss the implications that these findings have for future research. Copyright © 2010 John Wiley & Sons, Ltd.     

How do interdependencies among human‐capital deployment,development, and diversification strategies affect firms' financial performance?

Using key insights from the resource‐based view of the firm, we develop and test a theory of how firms can successfully deploy and develop their strategic human assets while managing the trade‐offs in their service and geographical diversification strategies. In a sample of large law firms we find that, even though firms profit from expert human‐capital leveraging strategy and service and geographical diversification strategies individually, pursuing these strategies simultaneously at high levels produces negative interaction effects on firm profitability. In addition, the internally developed, firm‐specific associate human capital strategically fits better with high levels of expert human‐capital leveraging. While lateral hiring helps firms build new knowledge bases and take advantage of growth opportunities, pursuing high levels of both expert human‐capital leveraging and lateral hiring of associates results in lower profitability. To fully capture the economic benefits from strategies of diversification, human‐capital leveraging and lateral hiring, firms should understand and manage the complex interdependencies among multiple levels of strategy. Copyright © 2005 John Wiley & Sons, Ltd.     

Corporate Transparency and Firm Growth: Evidence from Real Estate Investment Trusts

Using a panel data set of Real Estate Investment Trusts (REITs), we find corporate transparency to be positively associated with REIT growth. These results suggest that greater transparency facilitates firm growth by relaxing information‐based constraints on external financing. The magnitude of this effect is larger in the equity market than in the debt market. Moreover, the sensitivity of investment to cash flows is decreasing in transparency, evidence that transparency relaxes liquidity constraints. Finally, we find more transparent REITs are less likely to crash.     

Captive Financing Arrangements and Information Asymmetry: The Case of REITs

For the sample period of 1985 and 1986, captive real estate investments trusts (REITs) have a larger bid-ask spread than noncaptive REITs, after controlling for trading volume, price volatility, insider holdings, institutional holdings and firm size. Based on the bid-ask spread literature, the results suggest that captive firms are subject to a greater degree of information asymmetry. This implies a higher cost of capital for captive firms. The evidence here and the trend toward self-administered REITs imply that information asymmetry and conflicts of interests within REITs are priced.     

REIT Capital Structure Choices: Preparation Matters

Sun, Titman and Twite find that capital structure risks, namely, high leverage and a high share of short‐term debt, reduced the cumulative total return of U.S. 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 that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk‐reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis.     

The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs

This article examines the wealth effects of 228 property acquisition announcements made by REITs publicly traded in Singapore and Japan, which are the two largest REIT markets in Asia. Adopting an aggressive growth‐by‐acquisition strategy, the newly listed REITs acquired a number of properties within a short time period. Despite their regular activities, we observe the acquisition announcements are associated with a significantly positive abnormal increase in shareholder wealth averaging 0.38% in a 5‐day window around the event date. Controlling for the method of payment, buyer's acquisition strategy and seller's relationship with the acquiring REIT, the regression results show that the likely sources of economic gains associated with acquisitions are economies of scale and better management by acquiring firms. We also find strong evidence that the market reacts less favorably to acquisitions involving a portfolio of properties as opposed to a single property and weaker evidence that it reacts less favorably to mixed‐use acquisitions. These findings suggest the presence of premiums on transparency and corporate focus.     

REIT and Commercial Real Estate Returns: A Postmortem of the Financial Crisis

In the years surrounding the financial crisis, the share prices of equity Real Estate Investment Trusts (REITs) were much more volatile than the underlying commercial real estate prices. To better understand this phenomenon we examine the cross‐sectional dispersion of REIT returns during this time period with a particular focus on the influence of their capital structures. By looking at both the debt ratio and the maturity structure of the debt, we separate the pure leverage effect from the effect of financial distress. Consistent with leverage and financial distress costs amplifying the price decline, we find that the share prices of REITs with higher debt‐to‐asset ratios and shorter maturity debt fell more during the 2007 to early‐2009 crisis period. Although REIT prices rebounded with the bounce back in commercial real estate prices, financial distress costs had a permanent effect on REIT values. In particular, we find that REITs with more debt due during the crisis period tended to sell more property and issue more equity in 2009, when prices were depressed.     

The Dynamics of REIT Pricing Efficiency

We study the dynamics of pricing efficiency in the equity REIT market from 1993 to 2014. We measure pricing efficiency at the firm level using variance ratios calculated from quote midpoints in the TAQ database. We find four main results. First, on average, the market is efficient, with variance ratios close to one. However, in any given year, there is considerable cross‐sectional variation in variance ratios, suggesting at least some firms are priced inefficiently. Second, higher institutional ownership by active institutional investors is related to better pricing efficiency, while passive ownership does not reduce pricing efficiency. Third, REITs that are included in the S&P 500 and S&P 400 are priced more efficiently than other REITs. For the S&P 500 firms, we find evidence that this was purely driven by sample selection, while for S&P 400 firms, we find evidence that it is inclusion in the index that drives efficiency. Finally, we find evidence that firm investment, analyst coverage and debt capital raising activity can influence pricing efficiency.     

The Impact of Dividend Reinvestment Plans on Firm Payout Choices—Evidence from Real Estate Investment Trusts

This study investigates whether firm dividend payout choices are influenced by the presence of a Dividend Reinvestment Plan (DRIP). Given that DRIPs help retain capital, we show that dividend‐paying firms with a DRIP will tend to pay a high dividend and maintain a stable payout policy. Using a multinomial logistic model, we show that in comparison to REITs without DRIPs, REITs with DRIPs have a higher payout ratio and are less likely to: (1) pay regular dividends with extra dividends and share repurchases, (2) distribute extra dividends, repurchase shares, yet omit regular dividends and (3) omit all payouts. In addition, we find that REITs with a capital‐retaining DRIP invest more aggressively and such increased investment activities are undertaken without raising the reliance on external financing.