The Effects of Shifting Tax Regimes; The Curious Case of International REITs



This paper contributes to the stream of literature which assesses the effects of financial regulation by analyzing how the introduction of REIT regimes influences the performance of listed real estate investment firms. Introducing a tax transparent REIT regime means firms face a trade-off between tax advantages and corporate flexibility with respect to dividend payout policy, capital structure and the span of their activities. We document that firms which transit to a REIT regime experience a decrease in leverage, an increase in dividend payouts, and a mild jump in turnover levels. At the same time, we find evidence of structural breaks when applying standard asset pricing models; in about half of the analyzed cases there are changes in measures of systematic risk, but there appears to be no effect on excess returns. In order to better grasp the effects on systematic risk, we decompose the beta into a cash-flow beta and a discount beta. It turns out that the dividend payout criterion of REITs effectively increases the cash-flow beta of a firm, while the discount rate beta weakens. These results indicate that financial regulation, like a REIT regime, changes the composition of firm risk, more so than the total level of risk itself.
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Sebastian Gryglewicz