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Financial Flexibility and Manager–Shareholder Conflict: Evidence from REITs
Author(s) -
Riddiough Timothy,
Steiner Eva
Publication year - 2018
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.12226
Subject(s) - leverage (statistics) , debt , debt to capital ratio , equity (law) , capital structure , business , real estate , enterprise value , equity value , corporate governance , real estate investment trust , finance , debt to equity ratio , flexibility (engineering) , monetary economics , economics , financial system , internal debt , profitability index , debt levels and flows , return on equity , equity ratio , population , sociology , computer science , machine learning , nonprobability sampling , demography , management , law , political science
Using equity Real Estate Investment Trust data, we show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower leverage outcomes. We then show that firm value is sensitive to leverage levels, where lower leverage is associated with higher firm value. In the presence of weak managerial governance, our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm's debt capacity to enhance financial flexibility.