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Corporate Governance and Performance: The REIT Effect
Author(s) -
Bauer Rob,
Eichholtz Piet,
Kok Nils
Publication year - 2010
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2009.00252.x
Subject(s) - real estate investment trust , corporate governance , business , accounting , free cash flow , sample (material) , agency cost , index (typography) , real estate , cash flow , enterprise value , economics , monetary economics , finance , shareholder , chemistry , chromatography , world wide web , computer science
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.