Valuation Effects of Debt and Equity Offerings by Real Estate Investment Trusts (REITs)

This paper provides new evidence on capital structure decisions. We focus on real estate investment trusts (REITs) because they pay no or minimal taxes and are required to pay out 95 percent of their taxable income as dividends. As a result, REITs have no tax advantages of debt and, because of the dividend payout requirement, REITs access the capital markets more frequently than other firms. By eliminating the tax benefits of debt as an explanation for capital structure choice, we can focus attention on alternative explanations, specifically asymmetric information and agency costs. Our panel data set of REIT offerings also controls for factors that would otherwise differ across industries. In this unique setting, we expect managers ’ private information about their firm’s growth and investment opportunities to be revealed through offering decisions. Our finding that growing REITs with positive net present value investment opportunities access more external financing than stagnant REITs with poor investment opportunities is consistent with a signaling argument, and is inconsistent with an agency cost explanation that managers seek new capital to advance their personal goals. We observe more favorable market reactions around offerings (both debt and equity) made by REITs with better investment opportunities relative to REITs with lesser investment opportunities further supporting the signaling explanation. We note, however, that although our preliminary evidence indicates that the reaction to REIT equity offering