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



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 


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© Springer Science+Business Media, LLC 2010

Authors and Affiliations

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

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