Capital structure decisions of LPTs in a small economy
| Date | 03 August 2012 |
| DOI | https://doi.org/10.1108/14635781211256756 |
| Pages | 493-504 |
| Published date | 03 August 2012 |
| Author | Zhi Dong |
| Subject Matter | Property management & built environment |
Capital structure decisions of
LPTs in a small economy
Zhi Dong
Department of Property, The University of Auckland,
Auckland, New Zealand
Abstract
Purpose – The existing literature on real estate investment trust (REIT) capital-structure decisions
implicitly excludes either interest payment tax shield benefits or a trust’s growth potential. The
purpose of this paper is to test the long-term debt leverage decisions of listed property trusts (LPTs),
but without excluding interest payment tax shield benefits and growth potential. A new variable, the
exchange rate, is included in the tests, because financial products subject to globalization, such as
SWAPs are currently used to support the funding of small economies.
Design/methodology/approach – This paper uses a truncated regression and probit model to
empirically test two competing hypotheses – thetrade-off theory and the pecking order theory. It also
takes into account the implicit debt costs influenced by the exchange rate. The data for New Zealand
LPTs are used.
Findings – Unlike the existing literature, it is found that the trade-off theory is supported, while the
pecking order theory is rejected, when New Zealand LPTs are studied. The additional variable of the
one-year forward appreciation rate of the New Zealand dollar against the US dollar is found to have a
significant negative relationship with changes in the long-term debt ratio.
Practical implications – This paper suggests that LPTs tend to reduce long-term debt when the
market signals a possible appreciation of the New Zealand dollar.
Originality/value – The paper identifies the need to explicitly take into account both tax-shield
benefits and growth potential when testing competing hypotheses on capital structure decisions. It
also recommends including the exchange rate in the capital structure determinants test, especially
when companies or trusts in a small economy are studied.
Keywords New Zealand, Capitalstructure, Exchange rates, Real estate,Investments, Trusts,
Listed propertytrusts, Real estate investment trust, Smalleconomy
Paper type Research paper
1. Introduction
Evidence shows that UK listed property companies, European and US REITs capital
structure decisions are consistent with the predictions of the trade-off theory (Ooi, 1999;
Morri and Cristanziani, 2009; Boudry et al., 2010). US and European REITs are also
likely to conform to the pecking order theory (Morri and Beretta, 2008; Morri and
Cristanziani, 2009). However, REITs do not have tax shield benefits or hold high
growth property portfolios. REITs have substantial cash flow constraints due to the
dividend payout requirement (Hardin et al., 2009; Hill et al., 2010). REITs in most
countries are restricted to undertake significant developments or other investments
(Ooi and Neo, 2010).
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
The author would like to thank two anonymous referees of this journal, who provided valuable
comments. Thanks are also extended to an anonymous referee for the 17th Pacific Rim Real
Estate Society Conference, Gold Coast, Australia, 16-19 January 2011.
LPTs in a small
economy
493
Journal of Property Investment &
Finance
Vol. 30 No. 5, 2012
pp. 493-504
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211256756
To continue reading
Request your trial