Essays on Real Estate Investment Trusts: Corporate governance, institutional investment and corporate exit strategies

Date of Completion

January 2008


Economics, Finance|Economics, Theory




This dissertation consists of two essays examining issues surrounding Real Estate Investment Trusts, corporate governance, institutional investment, and corporate exit strategies. In the first essay we examine the factors that affect institutional investors' decisions to hold REIT shares. The main question we seek to answer is whether the existence of beneficial governance mechanisms is important in determining which REITs attract institutional investment. We study the effect of board structure and CEO characteristics on the level of institutional investment in REITs after controlling for appropriate firm-specific elements. We employ a quasi-maximum likelihood estimation method, and further test our results using instrumental variables to control for the potential endogeneity of CEO compensation and REIT performance. ^ We provide evidence that the costs of restricting cash flow exceed the governance benefits realized through greater management control. We find institutional ownership is greater when boards of directors are busier and less tenured, and when the CEO has less stock ownership. ^ In the second essay, we examine the cohort of 200 public Equity REITs that exist in 1996 and measure changes in corporate status through 2006. More than half of the cohort group exit from the population during the eleven-year period of study. The purpose of our paper is to systematically examine the nature of these exits. We measure abnormal returns to shareholders around announcement of the exit, and conduct logistic regression analyses to test the likelihood of exit from the population, and the likelihood of exit by a particular strategy. ^ Our main findings are (a) smaller REITs with lower debt ratios, lower profit margins and traditional structure are more likely to exit, (b) returns are positive for exit announcements and are greatest when firms merge private or liquidate, (c) the most common exit vehicle is public-public merger, and (d) diversified REITs are less likely to exit by merger than specialized REITs, smaller REITs are more likely to exit by public-public merger or liquidation, and REITs with the UPREIT structure are more likely to exit by public-private merger. ^