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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2011. "Fee Structure, Financing, and Investment Decisions: The Case of REITs," Working Paper series 30_11, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:30_11
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    File URL: http://www.rcea.org/RePEc/pdf/wp30_11.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Real Estate Investment Trusts; Fees; Debt; Investment;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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