Testing capital structure theories : Evidence from REITs

Abstract

The trade-off theory, the pecking order theory and the market timing theory are three competing theories of capital structure that have been widely examined in finance literature. But empirical tests of REITs capital structure were limited.This study employs a partial adjustment model of Fama and French (2002) and a market timing model of Baker and Wurgler (2002) to test the applicability of the three competing theories in explaining the capital structure of REITs. The results show that REITs financing behavior was consistent with the trade-off theory. For the other two theories, the hypotheses could not be rejected.