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Drivers and pricing in the acquisition of a property company

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  • Law

Abstract

Managerial Risk-Taking Incentive and Secured Debt: Evidence from REITs WEI Yuan1 Department of Real Estate School of Design and Environment National University of Singapore 4 Architecture Drive Singapore 117566 (65)8371-6386 [email protected] ONG Seow Eng Department of Real Estate School of Design and Environment National University of Singapore 4 Architecture Drive Singapore 117566 [email protected] March, 2011 1 Corresponding author. We thank Wong Woei Chyuan, Le Thi Thanh Thao, Li Yida, and Derek John Vollmer for their kindly suggestions and comments. 1 Managerial Risk-Taking Incentive and Secured Debt: Evidence from REITs ABSTRACT This study examines the impact of managerial risk-taking attitudes on firm’s debt seniority policies. Following Coles, Daniel and Naveen (2006) we viewed higher value of the sensitivity to stock return volatility in managerial compensation (Vega) as indication of managers’ tendency to adopt a riskier policy choice. Using sample of US equity REITs during 2001-2009, we found a positive relation between secured debt ratio and Vega implying that risk-taking managers tend to use more secured debt in their capital structure. There are two plausible explanations for this observation. “Free cash flow hypothesis” posits that high risk-taking managers use more secured debt with purpose to generate more free cash flow to finance their risky projects. “Contracting cost hypothesis” on the other hand argues that increased secured debt helps attenuate the agency cost between shareholders and creditors arising from higher managerial risk-taking incentives. Key words: Executive compensation, Managerial incentives, Secured debt ratio 2 I. Introduction The use of equity-based executive compensation, such as stock and option, has widely increased for the past few decades (Murphy,

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