Two essays on the corporate governance for real estate investment trusts (REITs)
Essay one investigates the relation between firms’ investment choices and various governance mechanisms, using a sample of Real Estate Investment Trusts (REITs). We find evidence that the responsiveness of REITs’ investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin’s q if they have greater institutional ownership, or lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm’s investment policies, and with high insider ownership allowing managers to follow their own investment agendas. Essay two reexamines the diversification discount using a sample of REITs from 1995 to 2003. We investigate the wealth effect of diversification across property type and regional locations. We find that regional diversification has a significant negative impact on firm value. Examining the determinants of corporate diversification, we discover that past growth opportunities are negatively related to the probability of diversifying choices. Moreover, this effect is mitigated in firms with high institutional ownership. This is consistent with the agency cost hypothesis that managers engage in buying-growth diversification and institutions could reduce the probability of such behavior. The influence of institutional investors has a significant value impact as well: firms with high institutional ownership are associated with lower regional diversification discount. Within two institutional sub-groups -- potentially active and passive monitoring institutions, it is potentially active ones that display such value impact, not the potentially passive ones. We conduct several tests to distinguish two hypotheses: that institutions play a monitoring role, or they selectively hold shares of certain firms. The results from simultaneous equation models support the monitoring story. Last, we also investigate the effect of other governance variables in firms’ diversifying choices and the diversification discount. We find that direct effect of other governance variables on diversifying decision is weak. Yet, as a group they significantly influence the regional diversification discount.