Financial Flexibility and Manager–Shareholder Conflict: Evidence from REITs

Abstract

financial flexibility and manager-shareholder conflict: evidence from reits timothy riddiough ∗ eva steiner† june 1, 2017 abstract we show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower and more stable leverage outcomes. we then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm’s debt capacity to enhance financial flexibility. ∗school of business, university of wisconsin-madison, 5262d grainger hall, madison, wi 53705, telephone: +1 (608) 262-3531, email: timothy.riddiough@wisc.edu †corresponding author: school of hotel administration, cornell sc johnson college of business, 465b statler hall, ithaca, ny 14853, telephone: +1 (607) 255-6697, email: ems457@cornell.edu. we thank andrew karolyi, harry deangelo, sheridan titman, brent ambrose, mike kirby, as well as seminar participants at cornell university, the university of wisconsin-madison, the university of cambridge, penn state university, the areuea national conference 2015, the assa conference 2016 and the nareit advisory board for helpful comments and suggestions. we gratefully acknowledge the financial support of the european public real estate association. all remaining errors are our own. collateral …

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