Capital Structure

Capital Structure Theory
Evidence from European Property Companies’ Capital Offerings
Dirk Brounen and Piet M.A. Eichholtz
Forthcoming in Real Estate Economics 21(4) 2001

Abstract This study examines the stock price reactions on announcements of both equity and debt offerings by European property companies. The unique setting in which corporate tax rates vary between different countries enables us to test established theories in the field of capital structure. In accordance with theory we find a negative price reaction on equity offering announcements, which is less severe for low-tax countries and positive price reactions on the announcements of debt offerings. Besides tax arguments we also test altern ative explanations by analyzing variations in stock reactions based on differences in the relative size of the issue, the pre-offer leverage, the underlying property types and operational performance. The results show that corporate taxation, issue size and operational performance are significant explanatory factors in the negative price reactions. Keywords: SEOs, property companies and capital structure

Correspondence:
Dirk Brounen University of Amsterdam Roeterstraat 11 NL-1018 WB Amsterdam Tel.: +31 205256004 Fax: +31 205255285 dirkb@fee.uva.nl

Introduction Capital structure theory is one of the most puzzling issues in the corporate finance literature. Numerous empirical studies have shown that announcements of seasoned equity offerings (SEOs) cause negative price reactions, whereas the news of an additional debt issue is followed by an increase in stock prices. The majority of these studies use capital structure arguments emphasizing the importance of tax shield benefits from debt financing, as the explanation for this phenomenon. In this paper we investigate whether differences in tax regimes, in the relative size of the issues, the pre -offer debt-to-equity ratio, the underlying property type and operational performance can account for the price... [continues]

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