Using REIT Follow-on Equity Offerings to Pay Down Credit Line Balances : Bank Certification or Monitored Financial Flexibility?

Using hand collected data from offering prospectuses and other corporate filings, we examine the market response to real estate investment trust (REIT) follow-on stock offerings’ stated uses of proceeds. We also track REIT banking relationships over time. Consistent with the idea of bank certification, we show that markets react relatively favorably to REIT equity offers where issuers have lending relationships with affiliates of the underwriters. However, we also find that reactions are most favorable where REIT issuers intend to repay their bank’s line of credit, regardless of the bank’s affiliation with the underwriters. We posit that credit line repayments preserve benefits of bank monitoring (Acharya, Almeida, Ippolito, Perez 2014) and enhance financial flexibility (DeAngelo, Gonçalves, Stulz 2018). Further examination reveals that monitored financial flexibility is the dominant effect