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Research Seminars & Workshops @ IRES

Professor Zhang Zhipeng
Boston College, Carroll School of Management

Asset Liquidation Value and Choice of Financing: Evidence from Real Estate Investment Trusts


20 July 2010 (Tue)


3.30 pm - 5.30 pm


RMI Executive Seminar Room
21 Heng Mui Keng Terrace, Level 4


Shleifer and Vishny (1992) provide a theory linking the liquidation value of the assets of a firm to the financing choice of a firm. According to this theory, assets that a firm finds harder to shift into alternative uses will have a lower liquidation value during periods of distress, and as such are harder to finance with debt ex-ante. Real Estate Investment Trusts (REITs) provide a natural venue to test this hypothesis since the assets of a REIT are relatively easier to value. We use capitalization rates, recoveries in foreclosures and lease structures to construct a metric to measure the liquidation value of each REIT. Using the incremental financing decisions of all equity REITs between 2000 and 2008, we show that REITs with high asset liquidation values prefer to issue debt rather than equity when faced with a choice of financing. The effect of expected liquidation value is significant, even after controlling for other factors that influence financing decisions such as leverage ratio target (tradeoff theory), growth opportunities (pecking order theory) and NAV / Equity (market timing).

About The Speaker

Dr. Zhang is an assistant professor of finance at Boston College's Carroll School of Management. He has broad research interests in corporate finance and financial institutions, including distressed firm restructuring, bankruptcy and liquidation, capital structure, banking, and credit risk. His ongoing research projects study determinants of default recovery rates, strategic bankruptcy decisions, and the incremental financing choices of REITs.

Professor Zhang received a Ph.D. in Finance from the Graduate School of Business at Stanford University, where he was also a graduate research assistant and instructor. He holds a B.S. in Physics and Economics from Caltech. He also attended Peking University in Beijing, China as an undergraduate.

For full paper, download here

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