An Analysis of the Financing Decisions of REITs: The Role of Market Timing and Target Leverage

48 Pages Posted: 28 Apr 2008

See all articles by Joseph T. L. Ooi

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Luke Li

National University of Singapore (NUS) - Department of Real Estate

Abstract

This paper examines the role of capital market conditions and target leverage on the marginal financing decisions of REITs, which include both capital raising and capital reduction activities. We investigate the relevance of a hybrid hypothesis whereby REITs have target leverage, but they also choose and time their marginal financing decisions according to the capital market conditions. The empirical results suggest that target leverage behavior plays a secondary role to market timing behavior in the financing decisions of REITs. In particular, we find strong and consistent evidence that REITs exhibit market timing behavior in terms of when and what type of capital to issue or reduce. Such market timing practices, motivated by attempts to take advantage of capital market conditions, may shift the firms away from their target leverage. However, we observe that in the long run, most REITs do move their capital structure towards the target debt level.

Keywords: capital structure, market timing, target leverage, REITs

JEL Classification: G32

Suggested Citation

Ooi, Joseph T. L. and Ong, Seow Eng and Li, Luke L., An Analysis of the Financing Decisions of REITs: The Role of Market Timing and Target Leverage. Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1126232

Joseph T. L. Ooi (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

Luke L. Li

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

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