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What is the Relationship Between REIT Governance and Earnings Management?

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  • Paul Anglin

    ()

  • Robert Edelstein

    ()

  • Yanmin Gao

    ()

  • Desmond Tsang

    ()

Abstract

The empirical corporate finance literature claims that better corporate governance constrains earnings management, while others argue that the unique legal and reporting structure of REITs may reduce the need for such internal corporate governance. Using a sample of publicly traded REITs for the 2004–2008 time period, we examine the relationships amongst corporate governance, accruals earnings management, manipulation of Funds from Operations (FFO), and real earnings management. We find that corporate governance quality is unrelated to accruals earnings management and manipulation of FFO. At first glance, the findings suggest that managers need less internal oversight because of the more transparent reporting structure of REITs. However, we document that REITs engage in significant real activities manipulation for earnings management purposes. Our empirical findings further show that corporate governance characteristics, in particular board size, independence, number of board meetings and audit committee financial expertise, are essential for constraining such activities. Finally, by focusing on a subset of REITs that act in ways which previous research has identified as more susceptible to earnings management activities, we demonstrate that good corporate governance effectively reduces accruals earnings management and manipulation of FFO for these REITs. Overall, our findings indicate that, despite the unique legal and reporting structure, REITs engage in certain forms of earnings management, and that the ability for REITs to manipulate earnings is reduced when corporate governance is more effective. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jrefec:v:47:y:2013:i:3:p:538-563
    DOI: 10.1007/s11146-012-9367-y
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:jrefec:v:56:y:2018:i:3:d:10.1007_s11146-017-9649-5 is not listed on IDEAS
    2. repec:eee:advacc:v:38:y:2017:i:c:p:1-14 is not listed on IDEAS
    3. repec:eee:jbrese:v:84:y:2018:i:c:p:253-270 is not listed on IDEAS

    More about this item

    Keywords

    Real Estate Investment Trusts (REIT); Corporate governance; Earnings management; FFO; JEL Classifications; G32; G34; M40;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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