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CEO overconfidence and financial policies of real estate investment trusts (REITs)

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  • Kenneth Yung
  • DeQing Diane Li
  • Qian Susan Sun

Abstract

This study investigates the effects of CEO overconfidence on real estate investment trust (REIT) financial policies and performance. The unique regulatory environment facing REITs make REIT financial policies less likely affected by agency problems and tax-related reasons, and thus provide a clearer picture of the effect of CEO overconfidence. In addition, the significant amounts of tangible assets of REITs provide performance measures that are relatively unbiased by unrelated elements. We find that REITs with overconfident CEOs use more debt, and in particular, longer term debt. Overconfident CEOs also buy back more shares and pay fewer dividends. CEO overconfidence does not have significant effects on REIT cash holdings. Regarding REIT performance, CEO overconfidence is negatively related to Tobin's q and return on assets, respectively. We also find that CEO overconfidence motivated leverage decisions and CEO overconfidence motivated share buybacks have significant negative effects on REIT performance. The results suggest that REITs with overconfident CEOs make mistakes in leverage and share buyback decisions. Lastly, we find that the effect of CEO overconfidence is non-linear. The results show that the effect of overconfidence comes mainly from the CEOs with higher levels of overconfidence. Our results also suggest that regulations do not have a moderating effect on CEO overconfidence.

Suggested Citation

  • Kenneth Yung & DeQing Diane Li & Qian Susan Sun, 2015. "CEO overconfidence and financial policies of real estate investment trusts (REITs)," Journal of Property Research, Taylor & Francis Journals, vol. 32(4), pages 384-406, December.
    • Handle: RePEc:taf:jpropr:v:32:y:2015:i:4:p:384-406
    DOI: 10.1080/09599916.2015.1088565
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    Cited by:

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    2. Helen X. H. Bao & Steven Haotong Li, 2020. "Investor Overconfidence and Trading Activity in the Asia Pacific REIT Markets," JRFM, MDPI, vol. 13(10), pages 1-21, September.
    3. 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.
    4. Saleh F. A. Khatib & Dewi Fariha Abdullah & Ernie Hendrawaty & Ahmed A. Elamer, 2022. "A bibliometric analysis of cash holdings literature: current status, development, and agenda for future research," Management Review Quarterly, Springer, vol. 72(3), pages 707-744, September.
    5. Helen Bao & Haotong Li, 2017. "CEO Overconfidence in Real Estate Markets: A Curse or A Blessing?," ERES eres2017_157, European Real Estate Society (ERES).
    6. Mahmoud Hijjawi & Chyi Lin Lee & Jufri Marzuki, 2021. "CEO Overconfidence and Corporate Governance in Affecting Australian Listed Construction and Property Firms’ Trading Activity," Sustainability, MDPI, vol. 13(19), pages 1-15, September.

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