The Impact of Misvaluation on Financing Decisions: Evidence from the Real Estate Investment Trust (REIT) Sector

We investigate the effects of misvaluation (defined as fluctuation in the market value of equity relative to its intrinsic value) on financing decisions of REITs (Real Estate Investment Trusts). Our findings reveal that misvaluation increases the likelihood of capital-increasing decisions (i.e., equity issues, debt issues and dual issues) and decreases the likelihood of capital-reducing decisions (i.e., equity repurchases and debt retirements). The impact of misvaluation on the equity-related decisions is consistent with market timing behaviour, whereas its impact on debt-related decisions is peculiar. Our further analyses document that due to exogenously capital constraints, highly misvalued REITs, which are motivated to undertake merger activities or new investments, issue both equity and debt financing because single equity capital might be insufficient to finance their new projects. In addition, the effects of misvaluation on debt-related decisions are different between REITs and non-real estate firms (non-REs).