| This research examines the factors influencing the cash policies of real estate investment trusts (REITs) and the market value of their liquid assets. We propose that the relatively low cash holdings of REITs are motivated by the unique operating conditions faced by these firms. To maintain their tax-exempt status, REITs must pay out a minimum of 90% of net income in the form of dividends. But this restriction does not eliminate the REIT's ability to accumulate cash because of depreciation expense. Thus, REIT advisors have the ability to accumulate cash but choose not to.; Based on a sample of publicly traded equity REITs, over the 1997 through 2005 period, our results show that cash varies inversely with cash flow, leverage, size, and excess dividends. Cash is directly related to the level of asymmetric information. The empirical evidence does not show that cash and cash flow volatility are directly related. Overall, the results show that the characteristics of REIT cash flows, dividend policy, and capital market access motivate these firms to hold less cash.; In addition, the impact of governance on REIT cash holdings is examined. The empirical evidence shows that advisement type has a statistically significant impact on liquid assets. Specifically, REITs with internal advisors hold significantly less cash than those with external advisors. This result is consistent with Jensen's (1986) free cash flow hypothesis because the incentives of external advisors and shareholders are not aligned. This finding is also consistent with externally-advised REITs having increased financial constraint.; Finally, this study concludes by estimating the marginal value of REIT cash holdings. The empirical evidence reveals that the market values {dollar}1 of REIT cash between {dollar}0.13 and {dollar}0.17. This is significantly lower than {dollar}1 and is much lower than the marginal value of cash for non-REITs. The characteristics of REIT cash flows coupled with the increased transparency of REITs reduce the likelihood of underinvesting which, in turn, reduces the perceived benefit of holding cash. |
