Review of Corporate Finance > Vol 2 > Issue 2

Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act

Manish Gupta, University of Nottingham, Business School South, UK, manish.gupta@nottingham.ac.uk
 
Suggested Citation
Manish Gupta (2022), "Asset Tangibility, Corporate Decisions, and Cash Flow Shocks: Evidence from the REIT Modernization Act", Review of Corporate Finance: Vol. 2: No. 2, pp 393-426. http://dx.doi.org/10.1561/114.00000018

Publication Date: 30 May 2022
© 2022 M. Gupta
 
Subjects
Corporate finance,  Financial markets,  Hypothesis testing,  Panel data
 
Keywords
JEL Codes: G31
Asset tangibilitycash flow sensitivitycash flow shocksleverage
 

Share

Login to download a free copy
In this article:
Introduction 
Related Literature 
The REIT Modernization Act (RMA) 
Hypotheses Development 
Data and Summary Statistics 
Empirical Tests 
Conclusion 
References 

Abstract

I examine the relationship between the availability of internal funds and the corporate decisions of firms with tangible assets. In the presence of frictions, a wedge exists between the costs of internal and external funds. Firms with collateral, such as real estate investment trusts (REITs), might face limited financing constraints for investment; however, changes in internal funds might still affect their corporate decisions other than investment, such as financing decisions and liquidity demand. The REIT Modernization Act of 2001 (RMA) lowered REITs’ payout threshold from 95% to 90%, which represents a positive shock to internal funds. I find that, first, REITs lowered their dividend payout in response to the shock, which implies an increase in their internal funds, and second, while the shock did not affect REITs’ investment or liquidity demand, it did reduce their additional security issuance and leverage. The results remain robust to a battery of additional empirical tests.

DOI:10.1561/114.00000018