Unpledged Collateral, REIT Liquidity Constraints, and Asset Sales

Using Real Estate Investment Trusts (REITs) industry as a laboratory, we test the impact of pledgeable assets on firms' asset sales and borrowing activity. We find that REITs with a higher ratio of encumbered assets sell their properties at lower prices. Consistently, by restricting a firm in the pool of assets that can be disposed, higher encumbrance ratios reduce profits from selling activity. We also document that loan spreads increase with higher encumbrance ratios. Finally, we find that the impact of encumbrance on selling activity and loan spreads is less pronounced for financially healthy REITs. Overall, our results show that the amount of unencumbered assets is an important determinant of selling activity and cost of borrowing.