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Fee Structure, Financing, and Investment Decisions: The Case of REITs

  • Pierpaolo Pattitoni

    ()

    (Department of Management, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy)

  • Barbara Petracci

    ()

    (Department of Management, University of Bologna, Italy)

  • Massimo Spisni

    ()

    (Department of Management, University of Bologna, Italy)

We propose a model to show how the fee structure of listed Real Estate Investment Trusts (REITs) can increase instead of decrease Management Company opportunistic behaviors. Distinguishing between performance fees paid on the fund market value and management fees paid either on the Net Asset Value (NAV) or on the Gross Asset Value (GAV), we show that only the former aligns the Management Company and shareholder interests. In particular, we demonstrate that management fees lead Management Companies to make suboptimal financing and investment decisions in order to maximize their own wealth at the expense of shareholders. We test the predictions of the model empirically using a panel of Italian listed REITs.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 30_11.

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Date of creation: Jul 2011
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Handle: RePEc:rim:rimwps:30_11
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