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Corporate Governance and Performance: The REIT Effect

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  • Rob Bauer
  • Piet Eichholtz
  • Nils Kok

Abstract

Real estate investment trusts (REITs) offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm-level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect. Copyright (c) 2009 American Real Estate and Urban Economics Association.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:reesec:v:38:y:2010:i:1:p:1-29
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    2. Patrick Lecomte & Joseph Ooi, 2013. "Corporate Governance and Performance of Externally Managed Singapore Reits," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 664-684, May.
    3. repec:kap:jrefec:v:57:y:2018:i:1:d:10.1007_s11146-017-9640-1 is not listed on IDEAS
    4. Chinmoy Ghosh & Scott Roark & C. Sirmans, 2013. "On The Operating Performance of REITs Following Seasoned Equity Offerings: Anomaly Revisited," The Journal of Real Estate Finance and Economics, Springer, vol. 46(4), pages 633-663, May.
    5. Brent W. Ambrose & Brad Case & Seow Eng Ong, 2015. "Introduction to the Special Issue," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 1-7, March.
    6. Marcelo Cajias & Franz Fuerst & Pat McAllister & Anupam Nanda, 2011. "Is ESG Commitment Linked to Investment Performance in the Real Estate Sector?," Real Estate & Planning Working Papers rep-wp2011-03, Henley Business School, Reading University.
    7. Eichholtz, Piet & Kok, Nils & Yonder, Erkan, 2012. "Portfolio greenness and the financial performance of REITs," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1911-1929.
    8. Chinmoy Ghosh & Le Sun, 2014. "Agency Cost, Dividend Policy and Growth: The Special Case of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 660-708, May.
    9. David H. Downs & Joseph T. L. Ooi & Woei-Chyuan Wong & S. E. Ong, 2016. "Related Party Transactions and Firm Value: Evidence from Property Markets in Hong Kong, Malaysia and Singapore," The Journal of Real Estate Finance and Economics, Springer, vol. 52(4), pages 408-427, May.
    10. Andonov, Aleksandar & Eichholtz, Piet & Kok, Nils, 2015. "Intermediated investment management in private markets: Evidence from pension fund investments in real estate," Journal of Financial Markets, Elsevier, vol. 22(C), pages 73-103.
    11. 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.
    12. Paul Anglin & Robert Edelstein & Yanmin Gao & Desmond Tsang, 2013. "What is the Relationship Between REIT Governance and Earnings Management?," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 538-563, October.
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    14. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    15. Bienert, Sven, . "METASTUDIE :NACHHALTIGKEIT CONTRA RENDITE? Die Implikationen nachhaltigen Wirtschaftens für offene Immobilienfonds am Beispiel der Deka Immobilien Investment GmbH und der WestInvest GmbH," Beiträge zur Immobilienwirtschaft, University of Regensburg, Department of Economics, number 14, November.
    16. Robert Edelstein & Wenlan Qian & Desmond Tsang, 2011. "How Do Institutional Factors Affect International Real Estate Returns?," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 130-151, July.
    17. Magdy Noguera, 2012. "The Impact of the Sarbanes-Oxley Act on the Structure of REIT Boards of Directors," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 869-887, November.
    18. Stergios Leventis & Panagiotis Dimitropoulos, 2012. "The role of corporate governance in earnings management: experience from US banks," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(2), pages 161-177, September.
    19. Cheung, William Mingyan & Chung, Richard & Fung, Scott, 2015. "The effects of stock liquidity on firm value and corporate governance: Endogeneity and the REIT experiment," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 211-231.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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