Agency costs and the determinants of the capital structure of REITs

The financial economics literature is replete with empirical studies which document the impacts of agency costs on the capital structure of industrial firms. However, until recently there have been few studies of these impacts on the share values of Real Estate Investment Firms (REITs). This study examines those impacts in light of the salient financial economics theories.; Certain clarifications to the 1986 Tax Reform Act permitted self-administered REITs, and by the early 1990s it was widely held in the popular literature that advisor REITs manifested agency costs. Hence, many REITs declared themselves to be self-administered, while nonetheless evidencing behaviors consistent with the advisor form. This study looks at both self-administered and advisor REITs, but also looks at the underlying behaviors associated with agency costs, such as type or geographic diversification. The study examines the cross-sectional impacts of these factors on REIT share returns following IPOs and debt offering announcements.; The study finds little support for a hypothesis that advisor REIT returns are negative following debt announcements, but does provide support for the Howe and Shilling (1988) model for debt announcements.; On the other hand, this study finds support for the hypothesis that self-administered REIT IPOs are priced similar to closed-end mutual funds, while advisor REIT IPOs are underpriced, similarly to industrial firm IPOs.