Using equity REIT data, 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 leverage outcomes. We then show that firm value is sensitive to leverage levels, where lower leverage is associated with higher firm value. In the presence of weak managerial governance, our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm’s debt capacity to enhance financial flexibility.
Riddiough, T., & Steiner, E. (2017). Financial flexibility and manager-shareholder conflict: Evidence from REITs [Electronic version]. Retrieved [insert date], from Cornell University, School of Hotel Administration site: https://scholarship.sha.cornell.edu/articles/1174
An earlier version of this paper can be found here: https://scholarship.sha.cornell.edu/workingpapers/24/