Property Segment and REIT Capital Structure

Mine Ertugrul and Erasmo Giambona

Online First™, 4 January 2010

Abstract

This paper relies on an increasing number of industry equilibrium studies linking a firm to its industry peers to help explain the observed REIT capital structure variation within property segments beyond what is possible with the traditional partial equilibrium trade-off and pecking order theories, which assume that each firm operates in isolation from other market participants and are not particularly suitable to REITs because of the regulated setting within which these firms operate. We build several proxies for a REIT’s position within its property segment. Consistent with the competitive equilibrium model of Maksimovic and Zechner (1991), we find that a REIT’s volatility of operating performance relative to the median volatility of operating performance of its segment peers is an important determinant of its leverage ratio. We also find that a REIT’s leverage ratio depends on the median leverage ratio in its segment. Leverage is also related to a REIT’s status as an incumbent and its role as a leader in the property segment.Keywords  Property segment – REIT competition – Capital structure

JEL Classification  G32

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