What factors affect the capital structure of real estate firms? An analysis between listed firms on the European market

Abstract

This thesis examines what factors that affect the capital structure of 84 listed real estate firms within the European Union for ten years during 2003-2012. To identify factors that affect capital structure a literature review is conducted to be able to analyse the regressions of the quantitative method. The dependent variable is leverage and the independent variables are size, return on equity, price-to-sales ratio, return, risk and one dummy variable for Real Estate Investment Trusts (REITs) and ten dummy variables for ten years. The theories from Modigliani and Miller, the trade off and the pecking order are presented and analysed along with the result from regressions in order to identify whether the variables affect the capital structure as foreseen by the theories. The sample is divided in REITs and Real Estate Operating Companies (REOCs) to be able to conduct the regressions. The result shows that return on equity (ROE) has a negative effect on leverage, price to sales ratio (PSR) has a negative effect on leverage and that risk has a positive effect on leverage for REITs. The variables; return on equity, price to sales ratio and risk are statistically significant. Hence, the expected outcome is as predicted and in line with the trade off model and the pecking order theory. The result for REOCs shows that PSR is significant. One of the models for REOCs suggests that leverage has decreased from the base year of 2003.