Asset Tangibility, Corporate Decisions, and Cash Flow Shocks : Evidence from the REIT Modernization Act

I examine the relationship between the availability of internal funds and the corporate decisions of firms with tangible assets. In the presence of frictions, a wedge exists between the costs of internal and external funds. Firms with collateral, such as real estate investment trusts (REITs), might face limited financing constraints for investment; however, changes in internal funds might still affect their corporate decisions other than investment, such as financing decisions and liquidity demand. The REIT Modernization Act of 2001 (RMA) lowered REITs' payout threshold from 95% to 90%, which represents a positive shock to internal funds. I find that, first, REITs lowered their dividend payout in response to the shock, which implies an increase in their internal funds, and second, while the shock did not affect REITs' investment or liquidity demand, it did reduce their additional security issuance and leverage. The results remain robust to a battery of additional empirical tests