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Inside Ownership, Risk Sharing and Tobin's q-Ratios: Evidence from REITs

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  • Dennis R. Capozza
  • Paul J. Seguin

Abstract

We investigate relations among inside ownership, managerial expenses, risk sharing and equity valuations. Our engine of analysis-Real Estate Investment Trusts (REITs)-provides a unique and rich framework for analysis since we can calculate extremely accurate measures of asset replacement costs, and hence relative valuation (Tobin's q). Further, the nature of the financial statements allows us to examine the impact of insider ownership on agency costs since we can accurately measure the costs of the entire management team. Our results show that firms with greater insider holdings tend to invest in assets with lower systematic risk and use less debt in their capital structure. At the same time, managerial expenses are lower as inside ownership increases. Finally, higher levels of insider ownership are associated with higher relative valuation as measured by both higher premiums to net asset value and higher multiples of cash flows. The results have implications for the design of optimal management contracts for both REITs and firms in general. Copyright 2003 by the American Real Estate and Urban Economics Association

Suggested Citation

  • Dennis R. Capozza & Paul J. Seguin, 2003. "Inside Ownership, Risk Sharing and Tobin's q-Ratios: Evidence from REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 367-404, September.
  • Handle: RePEc:bla:reesec:v:31:y:2003:i:3:p:367-404
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    Cited by:

    1. Wen-Hsiu Chou & William Hardin & Matthew Hill & G. Kelly, 2013. "Dividends, Values and Agency Costs in REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 91-114, January.
    2. Brent W. Ambrose & Dong Wook Lee, 2009. "REIT Capital Budgeting and Equity Marginal "q"," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(3), pages 483-514.
    3. Rob Bauer & Piet Eichholtz & Nils Kok, 2010. "Corporate Governance and Performance: The REIT Effect," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(1), pages 1-29.
    4. 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.
    5. William M. Gentry & Charles M. Jones & Christopher J. Mayer, 2004. "Do Stock Prices Really Reflect Fundamental Values? The Case of REITs," NBER Working Papers 10850, National Bureau of Economic Research, Inc.
    6. Lisa A. C. Frank & Chinmoy Ghosh, 2012. "Does firm governance affect institutional investment? Evidence from real estate investment trusts," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1063-1078, July.
    7. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 171-211, June.
    8. Walter Dolde & John Knopf, 2010. "Insider Ownership, Risk, and Leverage in REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 412-432, November.
    9. Robert H. Edelstein & Antoni Sureda-Gomila & Branko Urosević & Nicholas Wonder, 2010. "Ownership Dynamics with Multiple Insiders: The Case of REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(1), pages 57-90.
    10. Joseph Ooi & Jingliang Wang & James Webb, 2009. "Idiosyncratic Risk and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 420-442, May.
    11. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9577-9 is not listed on IDEAS
    12. repec:kap:jrefec:v:57:y:2018:i:1:d:10.1007_s11146-016-9568-x is not listed on IDEAS
    13. Nusret Cakici & Isil Erol & Dogan Tirtiroglu, 2014. "Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 415-440, April.
    14. Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2011. "Fee Structure, Financing, and Investment Decisions: The Case of REITs," Working Paper series 30_11, Rimini Centre for Economic Analysis.
    15. William Hardin & Kartono Liano & Gow-Cheng Huang, 2005. "REIT Stock Splits and Market Efficiency," The Journal of Real Estate Finance and Economics, Springer, vol. 30(3), pages 297-315, April.

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