Corporate Governance and Valuation of Publicly Real Estate Companies. An Empirical Study

In a setting of intense competition for international capital companies diligently have to respond to an increasing demand by investors for higher transparency and more effective mechanisms of corporate control. In this context the term ìcorporate governanceî has attracted major attention in the professional sphere and across different areas of academic research. The discussion on agency conflicts resulting from the separation of ownership and control as well as on governance mechanisms to reduce related agency costs have been subject to scientific literature for a long time. Since Berle/Means (1932) addressed potential conflicts of interest between management and shareholders of companies the understanding on key issues of corporate governance has improved. Nevertheless, a well-developed theory about the complex nature of corporate governance is still lacking. From a theoretical as well as from a professional perspective one of the most important issues with respect to corporate governance is whether it is rewarded by the capital market. While general finance literature includes numerous research studies on the impact of corporate governance on firm performance across different capital markets around the world the topic has been rather neglected in real estate literature. Using a set of corporate governance variables, our study empirically investigates the impact of corporate governance on the market value of publicly traded real estate companies for the major European real estate capital markets. For the purpose of the analysis a structural model will be specified and subsequently estimated with an appropriate estimation method. Some of the research questions that are of particular interest in this context include the following: - Is there a relationship between corporate governance mechanisms and the market valuation of publicly traded real estate companies? - Is a greater use of particular corporate governance mechanisms positively related to the valuation of publicly traded real estate companies by the capital market? - If there is a relationship is it economically relevant for decision makers of respective companies or for investors? - Do country-specific differences exist with respect to the importance of particular mechanisms for the governance of publicly traded real estate companies? - Which consequences can be derived for a corporate governance-guided management strategy in the real estate sector as well as for the investment strategy of real estate investors? //The study is supposed to contribute to the existing real estate corporate governance research in two basic ways. First, it provides an insight on the relationship of corporate governance mechanisms on the market valuation of publicly traded real estate companies across different European capital markets. To our knowledge prior research of this kind does only exist for US samples. Furthermore, instead of focusing on single control mechanisms and relying on self-constructed or professionally prepared corporate governance indices, which are likely to be inadequate proxies for a multi-dimensional and dynamic corporate governance construct, we apply a set of widely accepted corporate governance mechanisms.