This paper takes an integrated approach to examining the link between stock prices, investment, and capital structure decisions using data on a unique type of firm: Real Estate Investment Trusts (REITs). By using REITs, we are able to obtain high quality estimates of the net asset value of the firm, that can be used to create relatively accurate measures of Tobin’s q. In addition, REITs have institutional features that allow us to abstract from other factors that have complicated previous studies. We have three main findings. First, while REIT investment is weakly related to the traditional measure of q, it is quite responsive to an alternative measure of q based on NAV. A REIT whose NAV-based q ratio rises from 1.0 to 1.1 will increase its assets by ten percent in the next year. Second, the debt-to-value ratio responds to deviations in price-to-NAV ratio as well, but more sluggishly. A 0.1 increase in price-to-NAV ratio leads to a relatively modest 0.52 percentage point decrease in the following year’s debt-to-market-value ratio. Overall, REITs appear to finance marginal projects with a mix of debt and equity that is similar to their average debt-equity mix. Third, we find evidence that these relationships are nonlinear. Firms invest aggressively when q exceeds one, but do not dis-invest when q is below one. The investment results support traditional theories of firm investment with adjustment costs and imply that past difficulties in validating q theory are likely due to problems in adequately measuring q. The nonlinear relationship between investment and q is consistent with relatively high costs of disinvestment, but also agency models in which managers are reluctant to shrink the size of the firm. Finally, the evidence is weakly consistent with REIT managers attempting a limited amount of financial market timing based on quasi-public information on NAV.
1010 Affordable Housing Amazon Amenitization Architecture Artificial Intelligence Asia Australia automation Autonomous Vehicles bonds Borrowing Constraints Brexit California Canada Capital Business China Co-Working Environment coastal markets cold storage Colombia Commercial Brokerage Commercial Real Estate commissions Congestion consumer bias covid-19 CRE credit card market Credit Default Swaps Credit Insurance Credit Risk Transfers Culture Data Analytics data centers Data Collection Technology Debt Market Demand Demographics Density Development Discrete Choice disruption Diversity drones e-Commerce Economic Corridors economic policy economics education election studies Equity Funds Equity Market Ethnic Factors Europe Fannie Mae financial asset management Foreclosures Foreign Policy France Freddie Mac general equilibrium Global global economy Global Financial Crisis Globalization great depression Great Recession healthy buildings Hedonic hospitality Housing & Residential housing boom Housing Disease housing prices Housing Supply Identity Income Inequality India inflation Inter-generational mobility interest rates Investing jobs labor market Lagging Regions land use regulation Language life sciences Macroeconomics malls Market Pricing megacities Microeconomics Migration Minimum Payments Mixed-Use Mobility moral hazard mortgage insurance mortgage market Mortgage Rates Mortgages Multi-family Nation Building Non-Traditional Mortgages Office Market office sector pension funds Placed Based Policies Political Risk Price Discovery Private Equity Business public health public policy Public Schools real estate brokerage Real Estate Investment Real Estate Investment Trusts Recession Rental Retail Retirement reverse mortgages Risk Adjustment risk management risk-shifting robotics single family housing Slums Sorting South America Spatial Regions spillover effect stimulus package Sub-Prime Mortgages Supply Chains Sustainability Technology telecommunications trade transportation unemployment United States Urban Urbanization Warehouse welfare work from home