Transparency And Firm Valuation: The Reit-Effect

This research exploits the experimental laboratory offered by REITs by investigating how REIT corporate governance affects performance. We follow Gompers, Ishii and Metrick (2003) and use a corporate governance index to measure the overall impact of corporate governance on various measures of firm performance, including long-term stock performance, Tobinís Q and return on equity. Using an index has the merit of including the effects of all individual governance mechanisms in one single number (Black, Jang and Kim 2005; Boehren and Oedegaard 2003). Moreover, we do not rely on self-constructed measures, but we use unique and rich indices provided by Governance Metrics International (GMI) and Institutional Shareholder Services (ISS). Finally, we not only compare whether well-governed REITs outperform poorly-governed REITs, but our dataset also allows us to determine whether the distinct governance characteristics of REITs increase or decrease agency costs and thereby performance, by making comparisons between US REITs, a matched sample of US non-real estate firms and a sample of UK real estate firms.