Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/221909
Title: Managerial optimism and capital structure decisions of REITs
Authors: LIN JUNJIE
Keywords: Real Estate
Ong Seow Eng
2010/2011 RE
Capital structure
Debt financing
Managerial optimism
Stock
Underperformance
Issue Date: 21-Apr-2011
Citation: LIN JUNJIE (2011-04-21). Managerial optimism and capital structure decisions of REITs. ScholarBank@NUS Repository.
Abstract: Consistent with the recent literature on the importance of personal managerial attributes for corporate decisions, this dissertation examines both presence and impact of managerial optimism on capital structure decisions of REITs. Overestimation of firm’s future performance and holding false belief on undervaluation of firm’s current stock prices by capital market are the two behaviour traits manifested by an optimistic manager. As a result, these two attributes make optimistic managers more inclined to issue debt rather than equity. In a sample of 102 REITs over the period from 1998 through 2007, both pooled regression and panel regression unveil that managerial optimism is significant in explaining the financing decisions of REITs. When management optimism level is higher, REITs are more geared. Furthermore, following the model from Baker and Wurgler (2002), the evidence of market timing behaviour is not persistent in the context of REITs. Using Fama and French’s (1993) three factors and a momentum factor (Carhart, 1997), the four factor model is applied to examine the impact of managerial optimism. Results show that the intercept term is negative and significant at 1% level for the estimation periods of one year, two years and three years. Evidence on both the presence of managerial optimism and the penalty imposed by capital market on optimistic decision on external financing are established. This unveils that managerial optimism instead of agency problem is the source of suboptimal manager decision, such as investing in negative NPV projects. Furthermore, the assumptions of managers being extremely good at processing information and hundred-percent rationale are also challenged. Key Words: Capital Structure, Managerial Optimism, Debt Financing, Stock Underperformance.
URI: https://scholarbank.nus.edu.sg/handle/10635/221909
Appears in Collections:Bachelor's Theses

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