Journal of Real Estate Finance and Economics, 28:1, 59±79, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Creditworthiness or Management Signal? An
Empirical Investigation of Loan Commitments
Obtained by Non-taxable Firms
FAYEZ A. ELAYAN
Department of Finance, United Arab Emirates University, Al-Ain, UAE
THOMAS O. MEYER*
Department of Marketing and Finance, Southestern Louisiana University, Hammond, LA
Department of Accounting and Finance, Brock University, Ontario, Canada
Market reaction to the announcement of obtaining loan commitments (LCs) is examined for a unique sample of
tax-exempt real estate investment trusts (REITs). Debt-interest tax incentives may be ruled out on a theoretical
basis and empirically due to a signi®cant positive market reaction. Thus, evidence is developed to differentiate
between two signaling-effect explanations. The analysis supports the hypothesis that management procures LCs
to undertake new real estate investments. This action is interpreted by the market as a signal of management's
superior information regarding the REIT's true equity value.
Key Words: loan commitments, signaling effect, REITs, tax-exempt ®rms
Market response to announcements of bank credit agreements has been examined in
previous studies like James (1987), Lummer and McConnell (1989) and Best and Zhang
(1993). These studies attempt to determine if banks obtain special information as a result
of competitive advantages they possess relative to other lenders or due to the banks'
continuing relationship with these borrowers. However, the market response they ®nd may
possibly be due to leverage effects or the signal of ®rm equity value implicit in acquiring
loan commitments (LCs) (as opposed to a bank signal). Evidence is developed to
differentiate between these competing hypotheses using a unique sample of tax-exempt,
real estate investment trusts (REITs). The ®ndings provide greater support to the
hypothesis that acquisitions of LCs may be interpreted as a signal of management
information about the true value of the REIT's equity.
*Author for correspondence.