Corporate Governance and Performance: The REIT Effect

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Abstract

Real estate investment trusts (REITs) offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm-level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect.

Original languageEnglish
Pages (from-to)1-29
Number of pages29
JournalReal Estate Economics
Volume38
Issue number1
DOIs
Publication statusPublished - 1 Jan 2010

Keywords

  • ESTATE INVESTMENT TRUSTS
  • INFORMATION ASYMMETRY
  • EQUITY PRICES
  • OWNERSHIP
  • VALUATION
  • MARKET
  • AGENCY
  • COSTS
  • PROTECTION
  • MECHANISMS

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