The existing literature on real estate investment trust (REIT) capital‐structure decisions implicitly excludes either interest payment tax shield benefits or a trust's growth potential. The purpose of this paper is to test the long‐term debt leverage decisions of listed property trusts (LPTs), but without excluding interest payment tax shield benefits and growth potential. A new variable, the exchange rate, is included in the tests, because financial products subject to globalization, such as SWAPs are currently used to support the funding of small economies.
This paper uses a truncated regression and probit model to empirically test two competing hypotheses – the trade‐off theory and the pecking order theory. It also takes into account the implicit debt costs influenced by the exchange rate. The data for New Zealand LPTs are used.
Unlike the existing literature, it is found that the trade‐off theory is supported, while the pecking order theory is rejected, when New Zealand LPTs are studied. The additional variable of the one‐year forward appreciation rate of the New Zealand dollar against the US dollar is found to have a significant negative relationship with changes in the long‐term debt ratio.
This paper suggests that LPTs tend to reduce long‐term debt when the market signals a possible appreciation of the New Zealand dollar.
The paper identifies the need to explicitly take into account both tax‐shield benefits and growth potential when testing competing hypotheses on capital structure decisions. It also recommends including the exchange rate in the capital structure determinants test, especially when companies or trusts in a small economy are studied.
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