Article2007

The Impact of Corporate Governance on the Performance of REITs

Candy A. Bianco · Chinmoy Ghosh · Clemon F. Sirmans

66 citations0/0 files storedThe Journal of Portfolio Management

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Corporate Finance and Governance Financial Markets and Investment Strategies Corporate Governance and Financial Management

Abstract

The authors examine the relationship between the “external” governance index (G-Index) developed in a 2003 study Gompers et al. and performance of REITs in 2004 and 2006. The G-Index is a sum of takeover barriers instituted by individual REITs, and antitakeover provisions in the state of a firm9s incorporation. For the sample of REITs studies, the G-Index ranges from 3 to 13, with an average of 8. When compared to firms in general, shareholder rights in REITs are stronger than unregulated firms. The analysis shows, as expected, a significantly negative impact of G-Index on REIT performance for 2004. However, the effect is diminished in 2006. The authors contend that this is due to the G-Index of REITs increasing between 2004 and 2006, creating clustering around the mean value in 2006. This would render the G-Index less important when comparing performance across firms. In view of the fact that hostile takeovers are rare among REITs, the low G-Index and the irrelevance of G-Index in more recent times suggests that external governance is ineffective for REITs. Thus, more attention should be paid to the efficacy to internal governance mechanisms. TOPICS:Real estate, portfolio construction

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 2003Corporate Governance and Equity Prices 1999The Uncertain Relationship between Board Composition and Firm Performance 2004Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring 1997Valuation uncertainty, institutional involvement, and the underpricing of IPOs: The case of REITs 2006The Effect of Corporate Governance on Investment: Evidence from Real Estate Investment Trusts 2003Financing Choice and Liability Structure of Real Estate Investment Trusts

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