Enfoque pedagogía crítica

It is often argued that firms prefer to issue equity after its share price increase. Marsh (1982) states that in choosing between debt and equity, firms are heavily influenced by the past history of stock prices and market conditions. As explained by the Pecking Order Theory (POT), information asymmetry between firms and outside investors forces firms to sell the equity at a discount. Firms offer such a discount when the benefit of raising external equity capital outweighs the cost of the discount.

When shares are overvalued, a discount could be offered without any loss in the wealth of existing equity-holders. This is possible if equity is issued after a share price increase. This suggests an inverse relationship between the increase in share price and leverage ratio. However, such an inverse relationship with market-leverage may be observed due to artificial statistical distortions as the market value of equity increases with the change in market price even if there has not been any further equity issued.

Jallilvand and Harris (1984), Bayless and Diltz (1991) and Ooi (1999a) confirm that companies time their equity issues to coincide with favourable market conditions because the prospect of their shares being under-valued in a bull market is low. In addition, Casey, Sumer and Packer (2006) find that capital structure of limited partnership of REITs was directly influenced by market factors. The REITs debt levels are influenced by the price-to-book ratio and negatively relates to the percentage of institutional ownership and price-to-cash flow.

Conversely, equity capital is likely to be substituted with debt capital in a declining stock market as confirmed in Howton, Howton and McWilliams (2003) and Ooi, Ong and Li (2007). While this observation may reflect the reluctance of firms to issue under-valued equity stocks, it can also be explained by an increase in debt usage as well as a fall in asset values (Barkham, 1997).

2.5

Capital Structure Theory and Real Estate Property

As reviewed in the various sections above, the capital structure of firms under MM propositions is relevant and significant for three reasons: taxes, bankruptcy, and agency costs. Logically, under their theory, if none of these three factors are present, then capital structure should be irrelevant and there should be no pattern or cross- sectional differences in the use of debt in the capital structure. This view is reasonably aligned to the methods employed by the listed real estate property enterprises, especially the U.S listed Real Estate Investment Trusts (REITs) or Australian listed Real Estate Investment Trusts (AREITs), formerly known as Listed Property Trusts (LPTs).

For the purpose of this study, listed real estate property enterprises include listed real estate property companies which are directly involved in real estate property investment and/or the development of real estate property, and listed Australian real estate investment trusts (AREITs) which are involved mainly in real estate property investment.

Under the Australian income tax law (Income Tax Assessment Act 1936 (ITAA36) and Income Tax Assessment Act 1997 (ITAA97)) listed real estate property companies are taxable entities. The AREITs, however, are non-taxable entities, as long as at least 95 percent of taxable income is paid annually in the form

of a dividend. This, in effect, nullifies two significant benefits of debt financing. The first is the tax deductibility of interest payments and secondly that non-debt tax shield is non-existent. The second is that since most of the earnings are distributed to the equity-holders as dividend, debt servicing has only limited value insofar as agency cost of free cash flow is concerned. Costs of financial distress further reinforce the preference for equity of the REITs (Capozza and Seguin, 2004).

In relation to the bankruptcy costs, Capozza and Seguin (1999) argue that the effect of bankruptcy costs is less in the REITs sector than in others for two reasons. The first is that the larger and more economically significant type of bankruptcy costs, namely, the discount to book value when attempting to liquidate inherently illiquid assets, is greatly mitigated for REITs. Since there is an active, liquid market for underlying real estate assets the managers of a distressed REIT could liquidate some or all of their assets in a timely fashion at prices that do not represent large discounts from their normal market value. The second is that the direct costs of bankruptcy such as the fixed costs associated with lawyers, bankruptcy court costs and consultant fees, may still be pertinent. But, given the ability of a REIT to partially liquidate, full-blown bankruptcy procedures are rare. Therefore, given the low ex ante probability of incurring bankruptcy, managers need not consider them when creating or modifying a trust’s capital structure.

In relation to agency costs, or the ability of managers to enhance themselves compensation at the expense of equity-holders wealth, as with bankruptcy costs, there is not a potential for agency costs for a REIT’s structure. The REITs structure mitigates agency costs for at least two reasons. First, since the parallel market for real assets provides benchmark prices for assets, external equity-holders can quickly determine whether managers are engaging in empire building by over-spending on

real assets. The existence of this parallel market, which is unique for REITs, mitigates agency costs. The second advantage is the transparency of the income statement. Unlike more traditional firms, where extravagant or inefficient spending can be “hidden” under “Sales” or “Research and Development”, REITs have much less discretion in its accounting. Indeed, in their study of U.S REITs financing decisions, Capozza and Seguin (1999) observe that equity-holders are good at identifying even small deviations in general and administrative expenses, the one discretionary account REITs have, and deviations in these expenses have an economically and statistically significant impact on equity valuations. They conclude that the transparency of REITs makes it difficult for managers to engage in wealth destroying activities without being immediately detected.