Financial flexibility and security issuancedecisions

TL;DRAbstract

This paper examines the roles of financial flexibility in firms’ security issuance decisions.Focusing on Asian Real Estate Investment Trusts (REITs) that are subject to regulatory debt limit, we construct a direct proxy to financial flexibility measured as the difference between debt limit and actual debt ratio.This unused debt capacity or buffer measures financial flexibility as it indicates how much additional debt a REIT can issue.REITs maintain significant debt buffer in their balance sheet which equals to 25% of the total assets.This buffer has been relatively stable during the 10 years study period indicating a conservative debt policy being adopted by REITs in our sample.Controlling for investment policy, we find that REITs’ security issuance decisions are influenced by its debt buffer in a manner consistent with financial flexibilities hypotheses where REITs with larger (smaller) unused debt capacity are more likely to issue marginal debt(equity) in the next period. The drop in

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