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Linda Allen

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The first half of this paper studies the impact of bank screening on the risk of asset collateral pledged against secured loans for a sample of US equity REITs. Using a unique, hand-collected data sample, I show that bank screening results in lower risk assets being pledged as collateral, a finding confirmed by property type risk and location risk. Further, I find evidence consistent with the role of monitoring for secured, non-recourse mortgage loans. Finally, examining risk at the company level, I find that screening and monitoring of REITss assets via utilizing secured mortgage financing (as opposed to unsecured, recourse debt) lowers the overall company risk of a REIT.

The second half of this paper explores the heterogeneity of debt in REITs in terms of both financing costs and equity returns. Using a loan level data set of REIT borrowings and controlling for REIT risk and loan collateral, we find that interest costs on secured debt are greater than on unsecured debt. Further, access to public debt markets (via the issuance of unsecured recourse bonds) raises the cost of bank debt, inconsistent with the presence of a hold-up problem for REITs bank debt. Instead, we find evidence consistent with a bank certification effect since public debtholders benefit from the presence of monitoring banks. REITs with access to public markets continuously outperform REITs without access. The findings are robust to endogeneity controls and apply both during and outside the financial crisis of 2007-2009.

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