CAPITAL STRUCTURE AND ABNORMAL PERFORMANCE

Abstract

This study attempts to determine the relationship between capital structure and abnormal performance of 22 publicly listed Singapore property companies for the period 1993 to 2000. It aims to provide real estate practitioners with an understanding how financial strategies can influence company's abnormal performance. Knowledge in this aspect will increase the quality of financial and investment decision-making. External funding plays an important role in the capital structure of property companies more than any other company types. The study finds that property companies time their financing decision to according to market condition and risk-adjusted performance of property companies were badly affected since the anti-speculation measures in 1996 and the Asian economic crisis in 1997. Overall, property companies displayed negative normal returns over the period 1993 to 2000 This study finds financial leverage to be negatively related to abnormal performance. This implies that as financial leverage increases, the higher expected return is insufficient to compensate the higher financial risk faced by property companies, leading to lower performance on a risk-adjusted basis. The statistically significant relationship shows that financial strategy has a role to play in affecting risk-adjusted return performance of property stocks in addition to asset selection skills and market timing.