Corporate Tax, Cost of Financial debt, Cost of Value and Capital Structure: an instance Study of Reits and Conventional Property Firms in the Uk

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Business Tax, Cost of Debt, Expense of Equity and Capital Structure: A case examine of REITs and conventional real estate companies in the UK

College or university of Groningen

Faculty of Economics and Business

BSc International Business

January 2013

Table of contents

1 . Introduction4

2 . REITs7

3. Literary works Review9

three or more. 1 Capital Structure Irrelevance9

3. two Present Models10

4. Data and Methodology12

4. you Regression12

your five. Findings and Discussion16

6th. Conclusion20

six. Appendix21

almost eight. Bibliography30


In January 2007 the united kingdom adopted the globally good real estate investment trust (REIT) routine, allowing property firms to consider the REIT status while using benefit of instant exemption by corporate taxes. This research observes 13 UK REITs and 18 comparable conventional UK property firms during the years 2001-2011 to scrutinize in how long the corporate taxes exemption affects cost of debt and value and eventually capital structure by itself. I employ a difference-in-differences (DiD) analysis, whereby I distinction changes in a lot of variables of REITs and Non-REITs in the pre- and post-treatment period. This create enables me to establish empirical results in the given romantic relationship in the absence of changes in exogenous determinants. I actually find that the price tag on debt of REITs increases by just previously mentioned 30 percent when compared to that of Non-REITs. Moreover, the results demonstrate that although REITs financed a twenty-one percent increase in total property with a nearly 50/50 personal debt to value ratio, Non-REITs financed a 41 percent increase in total assets with 70/30 financial debt to value. This concurs with the requirement that REITs use relatively less financial debt because of the lacking tax motivation and higher implied costs of financial debt. However , I actually do not get significant comes from the DiD analysis, that this is brought on by this treatment.

Key phrases: REITs, corporate tax permission, security issuance decision Analysis theme: Cost of debt, expense of equity and capital framework Supervisor: Doctor Henk vonseiten Eije

1 . Introduction

Capital structure theory plays a decisive position in the corporate and economical world, and although it has become subject to plenty of academic exploration, the relationship of cost of capital and capital structure continues to be an unsolved puzzle pertaining to financial those who claim to know the most about finance (Howe, Shilling (1988), Maris, Elayan (1990)). Furthermore, the majority of the existing exploration results in summary theories and concepts with empirical proof lagging at the rear of the theoretical research, since the included variables tend to be difficult to isolate and to see. (Titman and Wessels, 1988)

This kind of study aims to shed light on the effect of the permission of corporate tax for the cost of debts relative to the price of equity and finally on capital structure by simply analyzing and comparing REITs to typical real estate businesses. REITs are chosen because the center of this study, as they allow a kind of natural try things out. The essential feature to this system is that once conventional real estate property firms start to function under the REIT program, they become tax-exempt, which is likely to cause a sudden increase with their cost of financial debt component as a result of now missing tax defend, previously imposed by the debt. This is produced from the computation for the weighted expense of capital (WACC). That is the total of the cost of equity (Re) multiplied with total collateral (E) over total assets (A) plus the cost of personal debt (Rd) increased with one minus the business tax rate (T) and the ratio total debt (D) over total assets. This study aims to examine whether and by how much the cost of personal debt and equity change following tax exemption and if so how this impacts in turn the main city structure of a firm.

This leads to the subsequent research questions:

1 . Does tax exemption impact the cost of debt and equity and if therefore , by just how much? 2 . Will the capital composition change because of a rise inside the cost of personal debt relative to the cost of equity?

As I complex in the materials review, My spouse and i...

Bibliography: Ambrose, B., Highfield, M. L., & Linneman, P. G. (2005). Real Estate and Economies of Size: The Case of REITs. Real estate property Economics, 33(2), 323-350.

Brown, G

Baker, M. & Wurgler, J. (2002). Market Time and Capital Structure. Diary of Financial, 57(1), 1-32.

Card, G. & Krueger, A. B. (1994). Minimal Wages and Employment: A Case Study with the Fast-Food Market in New Jersey and Pa. American Monetary Review, 84(4), 772-793.

Deloitte. (2012). UK REITs: A Summary of the Regime. Retrieved by

Dhaliwal, Deb., Heitzman, T., & Li, O

Howe, J. T., & Shilling, J. Deb. (1988). Capital Structure Theory and REIT Security Offerings. Journal of Finance, 43(4), 983-93.

Howton, H., Howton, S., & McWilliams, V

Jensen, M. C. & Meckling, W. L. (1976). Theory of the Firm: Managerial Tendencies, Agency Costs and Title Structure. Log of Financial Economics, 3(4), 305-60.

Jung, T., Kim, C. K., & Stulz, 3rd there’s r. (1996). Time, Investment Options, Managerial Discernment and The Security Issues Decision. Journal of Financial Economics, forty two, 159-185.


Kraus, A. & Litzenberger, Ur. H. (1972). A State-Preference Model of Optimal Financial Influence. Journal of Finance, 28(4), 911-22.

London Stock Exchange

Maris, B., & Elayan, F. (1990). Capital Structure and the Cost of Capital for Untaxed Organizations: The Case of REITs. AREURA Journal, 18(1), 22-39.

Miglo, A. (2010). The Pecking Order, Trade-Off, Signaling, and Market-Timing Ideas of Capital Structure: A Review. Available at SSRN: or

Miller, M

Modigliani, Farreneheit., & Burns, M. H. (1958). The price of Capital, Organization Finance as well as the Theory of Investment. American Economic Assessment, 48(3), 261-97.

Myers, S

Titman, S. & Wessels, 3rd there’s r. (1988). The Determinants of Capital Structure Choice. Record of Fund, 43(1), 1-19.


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