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Managerial Incentives: Implications for the Financial Performance of Real Estate Investment Trusts

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  • Michael E. Solt
  • Norman G. Miller

Abstract

In the face of informational asymmetry, REIT equity investors may bear the costs of agency. Hence, it is in shareholders' interests to pay incentive fees to induce managers to utilize their superior information and to take suitable actions that reduce these costs. In this paper, the relation between financial performance and fees paid, and between fees paid and contractual incentives, are examined to determine whether equityholder interests are being served by the decisions of REIT managers. The data reveal that fees paid and financial performance are positively related, indicating that financial performance is at least partially endogenous with respect to managerial action. Moreover, the evidence also suggests that the industry fee structure has changed over the period in a manner that appears to have reduced the agency costs borne by equityholders, and by the end of the sample period the fees paid in general seem to reflect incentives that are consistent with the wealth maximization goal of equityholders.

Suggested Citation

  • Michael E. Solt & Norman G. Miller, 1985. "Managerial Incentives: Implications for the Financial Performance of Real Estate Investment Trusts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(4), pages 404-423, December.
    • Handle: RePEc:bla:reesec:v:13:y:1985:i:4:p:404-423
    DOI: 10.1111/1540-6229.00362
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    Cited by:

    1. Roy T. Black & Hugh O. Nourse, 1995. "The Effect of Different Brokerage Modes on Closing Costs and House Prices," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 87-98.
    2. Jay C. Hartzell & Jarl G. Kallberg & Crocker H. Liu, 2008. "The Role of Corporate Governance in Initial Public Offerings: Evidence from Real Estate Investment Trusts," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 539-562, August.
    3. Hua Sun, 2010. "A Theory on REIT’s Advisor Choice and the Optimal Compensation Mechanism," The Journal of Real Estate Finance and Economics, Springer, vol. 40(4), pages 387-411, May.
    4. Willard McIntosh & Dennis T. Officer & Jeffrey A. Born, 1989. "The Wealth Effects of Merger Activities: Further Evidence from Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 4(3), pages 141-156.
    5. Thomas M. Springer & Neil G. Waller, 1996. "Maintenance of Residential Rental Property: An Empirical Analysis," Journal of Real Estate Research, American Real Estate Society, vol. 12(1), pages 89-100.
    6. Lynne B. Sagalyn, 1990. "Real Estate Risk and the Business Cycle: Evidence from Security Markets," Journal of Real Estate Research, American Real Estate Society, vol. 5(2), pages 203-220.
    7. Susanne Ethridge Cannon & Stephen C. Vogt, 1995. "REITs and Their Management: An Analysis of Organizational Structure, Performance, and Management Compensation," Journal of Real Estate Research, American Real Estate Society, vol. 10(3), pages 297-318.
    8. Nicolas Kohl & Wolfgang Schaefers, 2012. "Corporate Governance and Market Valuation of Publicly Traded Real Estate Companies: Evidence from Europe," The Journal of Real Estate Finance and Economics, Springer, vol. 44(3), pages 362-393, April.
    9. Randy E. Dumm & Charles Nyce & G. Stacy Sirmans & Greg T. Smersh, 2022. "Pricing Moral Hazard in Residential Properties: The Impact of Sinkhole Claims on House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 64(1), pages 30-70, January.

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