Financial Flexibility and At‐the‐Market (ATM) Equity Offerings: Evidence from Real Estate Investment Trusts

Abstract

This article examines at-the-market (ATM) equity programs as an additional source of financial flexibility. We find that firms with higher market-to-book ratios and greater institutional ownership are more likely to announce an ATM program. Firms using ATM programs are also more likely to issue shares when they have exhausted other viable financing alternatives, have timely investment opportunities and when market conditions are favorable. Finally, we document a significant negative announcement effect around the establishment of an ATM program, though the magnitude of this effect is significantly less negative than that of a comparable SEO.

Financial Flexibility and Investment: Evidence from REIT At‐the‐Market (ATM) Equity Offerings

“…Hartzell et al . () provide evidence that firms with higher market‐to‐book ratios and greater institutional ownership are more likely to announce an ATM program. Because managerial decisions to establish an ATM program are likely to be nonrandom, we utilize a Heckman () two‐stage estimation to examine the relation between ATM program access and subsequent investment.…”

“…This is similar to the set of predictive variables utilized in Hartzell et al . () in their model of ATM program determinants. To further meet the exclusion restriction of the Heckman specification, we include two additional variables in the first‐stage choice model that are excluded from the second‐stage estimation.…”

“…The positive difference in alphas suggests that access to an ATM program generates long‐run value for shareholders, in excess of that of a similarly timed SEO. This result complements Hartzell et al .’s () finding that investors appear to value the financial flexibility that ATMs offer at the time of the announcement.…”

“…While Hartzell et al . () and Billet, Floros and Garfinkel () have examined the market's response to the announcement of an ATM program, described firm characteristics associated with its establishment and documented determinants of equity issuance activity, little is known of how managers actually make use of this additional source of financial flexibility. Managers may choose to utilize this flexible funding option to more efficiently match capital raising efforts to timely investment opportunities.…”

“…See Hartzell et al . () for a detailed description of the process used to identify firms announcing ATM programs, an extensive overview of the requirements for opening an ATM program and the regulatory changes that have occurred in the evolution of ATMs as a source of capital. To ensure that we have identified all ATM firms, we also match our sample with ATM firms identified in SNL.…”