TIMING INTEREST RATE IN NEW PUBLIC DEBT ISSUES: EVIDENCE FROM EQUITY REITS IN THE UNITED STATES

Abstract

This study covers a study period of more than 10 years, from January 1993 to December 2005. It focuses on explaining how REITs time debt issuances in response to debt capital market conditions. Various prestigious databases have been used in conducting our research. They are ‘‘Public New Issues" from SDC Platinum, COMPUSTAT and Federal Reserve Bank of Saint Louis's FRED. In terms of modeling approach, besides OLS regression, our study also utilizes a binary logistic regression as a tool to examine the probability of issuing callable bonds by REITs. We develop a decile ranking system for market interest rates, following Barry et al. (2003). We conducted research on three important aspects of corporate debt issues, which are size of issue, maturity and call feature. Our results provide strong support for debt market timing theory of financing decisions. We find evidence that REITs time the market interest rates in all three regressions. Specifically, there is a negative and significant relationship between size of issues and historical ranking of interest rates. Regarding maturity timing, we find significant evidence that REITs tend to choose the shorter maturity when the current long-term interest rates are high. Interestingly, we find that REITs tend to choose longer debt maturity when the term spread is increasing. Our findings show that REITs issue callable bonds in an effort to forecast a drop in market interest rates. This helps validate those theoretical suggestions of Kraus (1983).