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Debt financing for U.S. real estate firms

Debt financing for U.S. real estate firms. ERES conference 2010, Milan Speaker: Eva Steiner (eva.steiner@lasalle.com) Joint work with: Dr Jamie Alcock, Kelvin Jui Keng Tan. Overview. Research motivation and objectives Theoretical development Research design Results Conclusions References.

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Debt financing for U.S. real estate firms

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  1. Debt financing forU.S. real estate firms ERES conference 2010, Milan Speaker: Eva Steiner (eva.steiner@lasalle.com) Joint work with: Dr Jamie Alcock, Kelvin Jui Keng Tan

  2. Overview • Research motivation and objectives • Theoretical development • Research design • Results • Conclusions • References ERES conference 2010, Milan

  3. 1. Research motivation and objective • Importance of debt for real estate investment due to the suitability of the underlying asset as debt security • Multidimensionality of capital structure (leverage and maturity) tends to be underrepresented in empirical studies • REIT / non-REIT comparison allows analysis of tax and regulation effects on capital structure of firms within one industry • 3SLS method accommodates for endogeneity and can improve estimation efficiency • Objective: Understand the nature of the interdependence between leverage and maturity in real estate ERES conference 2010, Milan

  4. 2. Theoretical development (1) The value of risky debt (2) The default risk premium (3) The total cost of debt ERES conference 2010, Milan

  5. Data Compustat data on U.S. listed real estate firms (SIC 6500-6552) and REITs (SIC 6798) Study period: 1973-2006 Unbalanced panel REITs (189 firm-year observations) Real estate companies (916) Methodology 3SLS setting Estimate bidirectional effects More efficient than 2SLS by exploiting cross-equation correlation of error terms Proxies for leverage and maturity hypotheses follow those originally chosen Low correlation between predictors 3. Research design ERES conference 2010, Milan

  6. 3. Research - Proxies ERES conference 2010, Milan

  7. 4. Results ERES conference 2010, Milan

  8. 5. Conclusion • Leverage-maturity relationship in real estate captured by 3SLS is richer than often assumed • Capital structure reflects effects of REIT regulation in terms of tax, agency costs and refinancing risk • REITs follow more offensive strategies: • Pecking order, signalling, transaction costs • Agency costs (volatility-related, agency costs of equity) • Non-REITs pursue more defensive strategies: • Trade-off theory, asset matching • Agency costs and refinancing risks ERES conference 2010, Milan

  9. 6. References • Alcock, J., F. Finn, and K. J. K. Tan (2010): “What determined the debt maturity decisions of Australian firms prior to the Global Financial Crisis?,” Working paper. • Barclay, M. J., and C. Smith (1995): “The maturity structure of corporate debt.,” Journal of Finance, 50(2), 609–631. • Bradley, M., G. Jarrell, and E. Kim (1984): “On the existence of an optimal capital structure: theory and evidence.,” Journal of Finance, 39(3), 857–878. • Brick, I. E., and S. A. Ravid (1985): “On the relevance of debt maturity structure.,” Journal of Finance, 40(5), 1423–1437. • DeAngelo, H., and R. Masulis (1980): “Optimal capital structure under corporate and personal taxation.,” Journal of Financial Economics, 8(1), 3–29. • Diamond, D. (1991): “Debt Maturity Structure and Liquidity Risk,” Quarterly Journal of Economics, 106, 709–737. • Donaldson, G. (1961): “Corporate debt capacity: a study of corporate debt policy.,” Harvard Graduate School of Business. • Flannery, M. J. (1986): “Asymmetric information and risky debt maturity choice.,” Journal of Finance, 41(1), 19–37. • Harris, M., and A. Raviv (1990): “Capital structure and the informational role of debt.,” Journal of Finance, 45(2), 321–349.Williamson, 1988 • Hart, O. (1993): Theories of Optimal Capital Structure: A Managerial Discretion Perspective. Washington, DC: The Brookings Institution. • Johnson, S. A. (2003): “Debt maturity and the effects of growth opportunities and liquidity risk on leverage.,” Review of Financial Studies, 16(1), 209–236. • Leland, H., and K. Toft (1996): “Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads.,” Journal of Finance, 51(3), 987–1019. • Myers, S. (1977): “Determinants of corporate borrowing.,” Journal of Financial Economics, 5(2), 147–275. • Myers, S., and N. Majluf (1984): “Corporate financing and investment decisions when firms have information that investors do not have.,” Journal of Financial Economics, 13(2), 187–221. • Ross, S. A. (1977): “The determination of financial structure: the incentive signalling approach.,” The Bell Journal of Economics, 8(1), 23–40. • Sharpe, S. (1991): “Credit rationing, concessionary lending and debt maturity structure.,” Journal of Banking and Business, 15(3), 581–604. • Titman, S. (1992): “Interest Rate Swaps and Corporate Financing Choices,” Journal of Finance, 47, 1503–1516. • Titman, S., and R.Wessels (1988): “Determinants of capital structure.,” Journal of Finance, 43(1), 1–19. ERES conference 2010, Milan

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