Debt and financial performance of reits in Malaysia: A moderating effect of financial flexibility

Zalina Zainudin, Izani Ibrahim, Rasidah Mohamad Said, Hafezali Iqbal Hussain

Research output: Contribution to journalArticle

22 Citations (Scopus)

Abstract

The use of debt by REITs entity seems to be a puzzle in numerous REITs literature, as REITs are tax-exempted business entities. The trade-off theory implies that the financing strategy of using debt provides no value in a REIT entity with a marginal tax rate of zero. However, high dividend pay-out requirement has limit REITs' ability to retain its internal earnings, thus require REITs to use debt to undertake its growth strategies. This study aims to investigate the great curiosity about the debt financing decision of REITs in Malaysia (MREITs) at all given no tax shield benefit and to examine the moderating effect of financial flexibility in a relationship between debt financing and the financial performance. Using the unbalanced panel data from all MREITs for the time period between 2005 and 2014, the results of this study are consistent with the pecking order theory in explaining the MREITs debt financing decision but are less supportive of the trade-off theory on tax benefits and agency theory of free cash flow on disciplinary tools. This suggests that MREITs use debt to support the growth needs than tax motives and the high dividend pay-out requirement behaves as a "disciplinary tool", not through the use of debt. The findings also reveal that financial flexibility plays an important role to alter the negative relationship between debt financing and financial performance to positive relationship. This study serves as a useful guide for MREITs' managers in managing financial flexibility as it has important moderating effects on the relationship between debt financing and financial performance.

Original languageEnglish
JournalJurnal Pengurusan
Volume50
Publication statusPublished - 1 Sep 2017

Fingerprint

Debt
Moderating effect
Financial performance
Malaysia
Financial flexibility
Real estate investment trusts
Debt financing
Dividend payout
Tax
Financing decisions
Trade-off theory
Tax shield
Business taxes
Marginal tax rate
Managers
Pecking order theory
Financing strategy
Agency theory
Free cash flow
Unbalanced panel data

Keywords

  • Debt
  • Financial flexibility
  • Financial performance
  • Moderating
  • REITs

ASJC Scopus subject areas

  • Business and International Management
  • Accounting
  • Business, Management and Accounting (miscellaneous)

Cite this

Debt and financial performance of reits in Malaysia : A moderating effect of financial flexibility. / Zainudin, Zalina; Ibrahim, Izani; Mohamad Said, Rasidah; Hussain, Hafezali Iqbal.

In: Jurnal Pengurusan, Vol. 50, 01.09.2017.

Research output: Contribution to journalArticle

@article{75fa177d2e364043b4c9ea7a7bd3eb23,
title = "Debt and financial performance of reits in Malaysia: A moderating effect of financial flexibility",
abstract = "The use of debt by REITs entity seems to be a puzzle in numerous REITs literature, as REITs are tax-exempted business entities. The trade-off theory implies that the financing strategy of using debt provides no value in a REIT entity with a marginal tax rate of zero. However, high dividend pay-out requirement has limit REITs' ability to retain its internal earnings, thus require REITs to use debt to undertake its growth strategies. This study aims to investigate the great curiosity about the debt financing decision of REITs in Malaysia (MREITs) at all given no tax shield benefit and to examine the moderating effect of financial flexibility in a relationship between debt financing and the financial performance. Using the unbalanced panel data from all MREITs for the time period between 2005 and 2014, the results of this study are consistent with the pecking order theory in explaining the MREITs debt financing decision but are less supportive of the trade-off theory on tax benefits and agency theory of free cash flow on disciplinary tools. This suggests that MREITs use debt to support the growth needs than tax motives and the high dividend pay-out requirement behaves as a {"}disciplinary tool{"}, not through the use of debt. The findings also reveal that financial flexibility plays an important role to alter the negative relationship between debt financing and financial performance to positive relationship. This study serves as a useful guide for MREITs' managers in managing financial flexibility as it has important moderating effects on the relationship between debt financing and financial performance.",
keywords = "Debt, Financial flexibility, Financial performance, Moderating, REITs",
author = "Zalina Zainudin and Izani Ibrahim and {Mohamad Said}, Rasidah and Hussain, {Hafezali Iqbal}",
year = "2017",
month = "9",
day = "1",
language = "English",
volume = "50",
journal = "Jurnal Pengurusan",
issn = "0127-2713",
publisher = "Penerbit Universiti Kebangsaan Malaysia",

}

TY - JOUR

T1 - Debt and financial performance of reits in Malaysia

T2 - A moderating effect of financial flexibility

AU - Zainudin, Zalina

AU - Ibrahim, Izani

AU - Mohamad Said, Rasidah

AU - Hussain, Hafezali Iqbal

PY - 2017/9/1

Y1 - 2017/9/1

N2 - The use of debt by REITs entity seems to be a puzzle in numerous REITs literature, as REITs are tax-exempted business entities. The trade-off theory implies that the financing strategy of using debt provides no value in a REIT entity with a marginal tax rate of zero. However, high dividend pay-out requirement has limit REITs' ability to retain its internal earnings, thus require REITs to use debt to undertake its growth strategies. This study aims to investigate the great curiosity about the debt financing decision of REITs in Malaysia (MREITs) at all given no tax shield benefit and to examine the moderating effect of financial flexibility in a relationship between debt financing and the financial performance. Using the unbalanced panel data from all MREITs for the time period between 2005 and 2014, the results of this study are consistent with the pecking order theory in explaining the MREITs debt financing decision but are less supportive of the trade-off theory on tax benefits and agency theory of free cash flow on disciplinary tools. This suggests that MREITs use debt to support the growth needs than tax motives and the high dividend pay-out requirement behaves as a "disciplinary tool", not through the use of debt. The findings also reveal that financial flexibility plays an important role to alter the negative relationship between debt financing and financial performance to positive relationship. This study serves as a useful guide for MREITs' managers in managing financial flexibility as it has important moderating effects on the relationship between debt financing and financial performance.

AB - The use of debt by REITs entity seems to be a puzzle in numerous REITs literature, as REITs are tax-exempted business entities. The trade-off theory implies that the financing strategy of using debt provides no value in a REIT entity with a marginal tax rate of zero. However, high dividend pay-out requirement has limit REITs' ability to retain its internal earnings, thus require REITs to use debt to undertake its growth strategies. This study aims to investigate the great curiosity about the debt financing decision of REITs in Malaysia (MREITs) at all given no tax shield benefit and to examine the moderating effect of financial flexibility in a relationship between debt financing and the financial performance. Using the unbalanced panel data from all MREITs for the time period between 2005 and 2014, the results of this study are consistent with the pecking order theory in explaining the MREITs debt financing decision but are less supportive of the trade-off theory on tax benefits and agency theory of free cash flow on disciplinary tools. This suggests that MREITs use debt to support the growth needs than tax motives and the high dividend pay-out requirement behaves as a "disciplinary tool", not through the use of debt. The findings also reveal that financial flexibility plays an important role to alter the negative relationship between debt financing and financial performance to positive relationship. This study serves as a useful guide for MREITs' managers in managing financial flexibility as it has important moderating effects on the relationship between debt financing and financial performance.

KW - Debt

KW - Financial flexibility

KW - Financial performance

KW - Moderating

KW - REITs

UR - http://www.scopus.com/inward/record.url?scp=85031672381&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85031672381&partnerID=8YFLogxK

M3 - Article

AN - SCOPUS:85031672381

VL - 50

JO - Jurnal Pengurusan

JF - Jurnal Pengurusan

SN - 0127-2713

ER -