The Journal of Real Estate Finance and Economics

, Volume 45, Issue 3, pp 588–603 | Cite as

Liquidity and the Future Stock Returns of the REIT Industry

  • Ming-Chi Chen
  • Chin-Yu Wang
  • So-De Shyu


This paper examines how deviations from expected optimal cash holdings affect future stock returns in the real estate investment trust (REIT) industry. Our findings indicate that REIT managers elect to hold less cash to reduce the agency problems of cash flow, supporting the pecking order theory that growth opportunities lead managers to retain more cash on hand. The results show that any deviation from the estimated optimal cash holdings is significantly detrimental to future market performance, suggesting that excess or insufficient cash is harmful to stock returns. The adverse influence of deviations above the optimal value is insignificantly stronger than that of deviations below the optimal value. We also find that the return performances of deviations that do not differ from the expected optimal value surpass those of deviations that differ significantly from the expected level. This implies that REIT managers determine their cash policies based on future growth opportunities and the external costs of capital. Finally, for REIT firms, holding excess or insufficient cash increases the possibility of agency conflict or underinvestment, which will consequently worsen the firm’s future performance.


Real estate investment trust (REIT) Cash holdings Agency problem Stock returns 


  1. Almeida, H., Campello, M., & Weisbach, M. (2004). The cash flow sensitivity of cash. Journal of Finance, 59, 1777–1804.CrossRefGoogle Scholar
  2. Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis. Journal of Finance, 32, 663–682.CrossRefGoogle Scholar
  3. Basu, S. (1983). The relationship between earnings yield, market value and return for NYSE common stocks: further evidence. Journal of Financial Economics, 12, 129–157.CrossRefGoogle Scholar
  4. Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do U.S. firms hold so much more cash than they used to? Journal of Finance, 64, 1985–2021.CrossRefGoogle Scholar
  5. Baum, C. F., Caglayan, M., Ozkan, N., & Talavera, O. (2006). The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity. Review of Financial Economics, 15, 289–304.CrossRefGoogle Scholar
  6. Baumol, W. J. (1952). The transactions demand for cash: an inventory theoretic approach. Quarterly Journal of Economics, 66, 545–556.CrossRefGoogle Scholar
  7. Berger, A., & Udell, G. F. (1995). Relationship lending and lines of credit in small firm finance. Journal of Business, 68, 351–381.CrossRefGoogle Scholar
  8. Brooks, C. (2008). Introductory econometrics for finance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  9. Damodaran, A. (2005). Dealing with cash, cross holdings and other non-operating assets: approaches and implications. Working paper, New York University.Google Scholar
  10. DeBondt, W. F. M., & Thaler, R. H. (1990). Do security analysts overreact? The American Economic Review, 80, 52–57.Google Scholar
  11. Diamond, D. W. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 51, 393–414.CrossRefGoogle Scholar
  12. Diamond, D. W. (1991). Monitoring and reputation: the choice between bank loans and directly placed debt. Journal of Political Economy, 99, 689–721.CrossRefGoogle Scholar
  13. Dittmar, A., & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83, 599–634.CrossRefGoogle Scholar
  14. Dittmar, A., Mahrt-Smith, J., & Servaes, H. (2003). International corporate governance and corporate cash holdings. Journal of Financial and Quantitative Analysis, 38, 111–133.CrossRefGoogle Scholar
  15. Faulkender, M., & Wang, R. (2006). Corporate financial policy and the value of cash holdings. Journal of Finance, 61, 1957–1990.CrossRefGoogle Scholar
  16. Fazzari, S., & Petersen, B. (1993). Working capital and fixed investment: new evidence on financing constraints. The Rand Journal of Economics, 24, 328–342.CrossRefGoogle Scholar
  17. Ferreira, M. A., Custodio, C., & Raposo, C. (2005). Cash holdings and business conditions. Working paper, European Corporate Governance Institute (ECGI).Google Scholar
  18. Ghosh, C., & Sirmans, C. F. (2006). Do managerial motives impact dividend decisions in REITs? Journal of Real Estate Finance and Economics, 32, 327–355.CrossRefGoogle Scholar
  19. Hardin, W., & Hill, M. (2008). REIT dividend determinants: excess dividends and capital markets. Real Estate Economics, 36, 349–369.CrossRefGoogle Scholar
  20. Hardin, W. G., III, Highfield, M. J., Hill, M. D., & Kelly, G. W. (2009). The determinants of REIT cash holdings. Journal of Real Estate Finance and Economics, 39, 39–57.CrossRefGoogle Scholar
  21. Harford, J. (1999). Corporate cash reserves and acquisitions. Journal of Finance, 54, 1969–1997.CrossRefGoogle Scholar
  22. Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. The American Economic Review, 76, 323–329.Google Scholar
  23. Keynes, J. M. (1936). The general theory of employment, interest, and money. New York: Harcourt Brace.Google Scholar
  24. Kim, C., Mauer, D., & Sherman, A. (1998). The determinants of corporate liquidity: theory and evidence. Journal of Financial and Quantitative Analysis, 33, 335–359.CrossRefGoogle Scholar
  25. Li, K. K. (2008). Expected holding of cash, future performance and stock return. Working paper: University of California at Berkeley.Google Scholar
  26. Mikkelson, W., & Partch, M. (2003). Do persistent large cash reserves hinder performance? Journal of Financial and Quantitative Analysis, 38, 275–294.CrossRefGoogle Scholar
  27. Milbourne, R. D., Buckholtz, P., & Wasan, M. T. (1983). A theoretical derivation of the functional form of short run money holdings. Review of Economics Studies, 50, 531–541.CrossRefGoogle Scholar
  28. Myers, S. C., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187–221.CrossRefGoogle Scholar
  29. Myers, S. C., & Rajan, R. G. (1998). The paradox of liquidity. Quarterly Journal of Economics, 113, 733–771.CrossRefGoogle Scholar
  30. Oler, D., & Picconi, M. (2010). Implications of insufficient and excess for future performance. Working paper: Texas Tech University.Google Scholar
  31. Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52, 3–46.CrossRefGoogle Scholar
  32. Ozkan, A., & Ozkan, N. (2004). Corporate cash holdings: an empirical investigation of UK companies. Journal of Banking & Finance, 28, 2103–2134.CrossRefGoogle Scholar
  33. Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11, 159–189.CrossRefGoogle Scholar
  34. Sufi, A. (2009). Bank lines of credit in corporate finance: an empirical analysis. Review of Financial Studies, 22, 1057–1088.CrossRefGoogle Scholar
  35. Tobin, J. (1956). The interest elasticity of the transactions demand for cash. The Review of Economics and Statistics, 38, 241–247.CrossRefGoogle Scholar
  36. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–838.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of FinanceNational Sun Yat-sen UniversityKaohsiungRepublic of China

Personalised recommendations