Corporate governance and REIT performance: Turkish REIT industry with concentrated ownership and no dividend payout rule

Klapper and Love (2003) argue that firm-level corporate governance matters more in countries with weak legal systems. On the contrary, Bianco, Ghosh and Sirmans (2007) state that the strict legal rules on payout, ownership and asset structure make REITs more attractive within global perspectives on corporate governance. This paper investigates whether the quality of corporate governance has significant impacts on the stock and operating performance of the Turkish REITs, which operate in a weak legal environment country. The Turkish REIT industry differs substantially from the global REIT market. First, Turkish REITs do not have to pay out dividends, yet enjoy the exemption from paying corporate taxes. The lack of payout requirement creates the free cash-flow problem (Jensen, 1986) and increases the agency costs. Second, Turkish REITs have a concentrated ownership structure. The legal requirement that a leader entrepreneur be present with a minimum equity position of 25% introduces the agency problem between the majority and minority owners. The leader entrepreneurs, as non-taxable institutional investors, appear to dictate Turkish REITsí dividend and debt policies and deplete REITsí dividends, causing them to go to the long-term debt market (Erol and Tirtiroglu, 2010). Hence, the need for corporate governance is more of concern for the Turkish REITs. This paper uses an unbalanced panel data of 23 REITs between 2003 and 2011 in an attempt to examine the impact of corporate governance quality on the performance of REITs in Turkey. In particular, we regress both the periodical returns and operating performance (ROE, ROA, Tobinís Q) of REITs on governance-auditing measures and ownership structure characteristics.