REIT Leverage and Return Performance: Keep Your Eye on the Target (original) (raw)
2015, SSRN Electronic Journal
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2015
This paper examines U.S. REIT leverage decisions and their effects on risk and return. We find that REITs are highly levered relative to industrial firms, with an average market leverage of 46 percent over our 1990-2012 sample period. We next investigate the determinants of optimal leverage levels and estimate the speed at which REITs close the gap between current debt levels and target levels. We find the speed of adjustment is 17 percent annually, with over-levered REITs tending to adjust more quickly to their target leverage ratios than under-levered REITs. We also find that REITs that are highly levered relative to the average REIT tend to underperform REITs with less debt in their capital structure. However, REITs vary considerably in their ability to undertake leverage. Moreover, REITs that are highly levered relative to their target (predicted) debt ratio actually perform better on a riskadjusted basis than under-levered REITs–consistent with a positive relation between lever...
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