CEO Involvement in Director Selection: Implications for REIT Dividend Policy

This paper examines the relationship between CEO entrenchment and dividend policy of real estate investment trusts (REITs). We develop an index for CEO entrenchment using CEO tenure and duality and find that this index has significant impact on dividend policy. We further separate our sample into two sub-groups: REITs with and without nomination committees. Our analyses show a strong positive relationship between CEO entrenchment level and dividend payout for REITs without a nomination committee. In REITs with nomination committees, CEO entrenchment has less influence on dividend policy. We conclude that dividend policy serves as a substitution for other governance mechanisms. Further, our results are consistent with the evidence for other US firms—CEO that are more entrenched pay higher dividends to avoid shareholder sanctions and the threat of takeover.

Real Estate Risk Exposure of Equity Real Estate Investment Trusts

This study examines the linkage between equity real estate investment trust (REIT) returns and the private real estate factor. The results reveal a tighter connection between REIT and the private real estate market starting from 1993. In addition, large-cap REITs seem to behave more like real estate than do small-cap REITs. Overall, the results are consistent with three notions: (1) that institutional investors provide information-gathering services (Bradrinath et al., Rev. Financ. Stud., 8:401–430, 1995), (2) that a more sophisticated investor base improves information flow, and (3) that a high degree of participation from institutional investors strengthens the linkage between REIT returns and the underlying real estate factor (Ziering et al., The evolution of public and private market investing in the new real estate capital markets, Prudential Real Estate Investors, Parsippany, NJ, 1997).

The Long-Horizon Performance of REIT Mergers

We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust (REIT) mergers, to test whether or not the anomaly of post-merger underperformance observed in conventional firms applies to the case of REITs. Constructing synthetic benchmark portfolios controlling for firm size and for book-to-market value ratio, we find that 60-month buy-and-hold abnormal returns for REIT acquirers are significantly negative at approximately −10%, supporting the position that REIT merger acquirers underperform non-merging REITs in the long run. We find no evidence to challenge previous studies reporting positive announcement period returns for acquirers when the target is privately held, but we do find evidence that these positive returns do not persist. The long term performance of acquiring REITs is approximately the same whether the target is public or private.

Director Compensation and CEO Bargaining Power in REITs

We analyze director compensation for Real Estate Investment Trusts (REITs) and investigate the relations between director compensation and other measures of the board independence and board monitoring. Using 136 REITs in 2001, we find that REITs that pay higher equity-based compensation to their board members are associated with higher financial performance. Our data indicate that board equity-based compensation is positively related to the existence of an independent nomination committee, however, it has no significant relationship with board size, proportion of outside directors, CEO duality and CEO tenure and ownership.

Analyst Activity and Firm Value: Evidence from the REIT Sector

This paper is the first to examine (1) properties of analyst forecasts and (2) effects of analyst following on firm value for all REITs on CRSP, Compustat and I/B/E/S. Our results suggest that REITs operate in an information environment that has changed over time. We find that for periods when the REIT industry was either in the developmental stage (pre-1992), or after other structural changes in the industry (post-2000), more analysts cover REITs and forecasts are more accurate and less biased. Further, we find that mortgage REITs are more transparent than other REIT structures and exhibit properties of analyst behavior that are different from other types of REITs. Our investigation into the effect of analyst coverage on REIT value suggests that analyst coverage increases REIT value (as measured by Tobin’s q) and that the causality does not run the opposite way.

Financial Leverage,CEO Compensation,and Corporate Hedging: Evidence from Real Estate Investment Trusts

This paper studies the determinants of corporate hedging practices in the REIT industry between 1999 and 2001. We find a positive significant relation between hedging and financial leverage, indicating the financial distress costs motive for using derivatives in the REIT industry. Using estimates of the Black–Scholes sensitivity of CEO’s stock option portfolios to stock return volatility and the sensitivity of CEO’s stock and stock option portfolios to stock price, we find evidence to support managerial risk aversion motive for corporate hedging in the REIT industry. Our results indicate that CEO’s cash compensation and the CEO’s wealth sensitivity to stock return volatility are significant determinants of derivative use in REITs. We also document a significant positive relation between institutional ownership and hedging activity. Further, we find that probability of hedging is related to economies of scale in hedging costs.

REIT IPOs and the Cost of Going Public

We examine Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) that went public between 1986 and 2004. Consistent with previous studies, we find that REIT IPOs are associated with lower levels of underpricing relative to traditional issues. We also find that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. In contrast, using an alternative measure of issuance costs that incorporates the share retention decision by preexisting owners, we find no significant difference between REIT and non-REIT issues, suggesting the results of previous studies are not robust to various specifications of issuance cost and that preexisting owners do not necessarily benefit from the lower level of underpricing. Additionally, we find no difference in the issuance costs of equity versus mortgage REITs, particularly once we control for the use of umbrella partnerships.

Mortgage Put Options and Real Estate Markets

In this paper we offer direct evidence that financial intermediation does impact underlying asset markets. We develop a specific observable symptom of a banking system that underprices the put option imbedded in non-recourse asset-backed lending. Using a dataset for 19 countries and over 500 real estate investment trusts, we find that, following a negative demand shock, the “underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced.

Investment opportunities,free cash flow,and stock valuation effects of secured debt offerings

This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues.

Discovering REIT Price Discovery: A New Data Setting

This study decomposes real estate investment trust (REIT) returns into two components: (1) real returns, and (2) public returns. The real returns are based on the changes in the private, appraisal-based net asset values of REITs, whereas the public returns are measured by the variations in REITs’ premiums/discounts. This study then investigates the price discovery of REIT prices. The results indicate that lagged public returns are useful in predicting real returns. In addition, the study documents concurrent factor exposures for public returns and lagged factor exposures for private returns under a variety of asset pricing models. Overall, the results are consistent with the notion that public markets are more efficient in processing information.

Momentum Profitability and Market Trend: Evidence from REITs

This study investigates Real Estate Investment Trusts’ momentum returns in different market states, and explains the momentum phenomenon with a risk-based dividend growth theory of Johnson (Journal of Finance 57:585–608, 2002). Our results show that momentum returns of REITs are higher during up markets. This study finds that winners’ dividend/price ratios are higher than those of losers, and momentum returns are positively correlated with the difference between winners’ and losers’ dividend/price ratios. We also find that momentum returns are higher after the legislation change of REITs in 1992, and that dividend/price ratios of REITs are also higher after 1992, suggesting that a persistent shock to REIT’s dividend/price ratios in 1992 partly explains REITs’ higher momentum returns after 1992. In sum, results of this study suggest that momentum returns of REITs can be jointly explained by a time-varying factor (market state) and a cross-sectional variance in dividend yields.

Dividend taxation and corporate investment: a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia

In recent times a number of countries have initiated some important tax reforms to eliminate the distortions of double taxation. In this context, Australia adopted a dividend imputation system in 1987, while the US employed the 1986 Tax Reform Act (TRA). The analysis in this paper examines the effects on the level of corporate capital investment, on proxies for corporate tax rates, financial leverage, liquidity, capital intensity and firm size after controlling for the tax reforms. The empirical results provide evidence that: (1) dividend imputation as introduced in Australia is an effective way to reduce the distortions caused by the traditional system of taxation. (2) Compared with the TRA, dividend imputation has been better able to positively stimulate corporate capital investment. (3) TRA effect on corporate investment is more pronounced in the US for firms having a net operating loss. (4) Individual tax rates play a role in corporate investment decisions in both the US and Australia.

Valuation of global IPOs: a stochastic frontier approach

This paper studies the impact of global offerings on US IPO firms’ offer price using the stochastic frontier approach. We find that the offer price valuation efficiency for global IPOs exceeds that of IPOs with purely domestic offers by 3.1%. In particular, the global offering approach is most appropriate to those IPO firms, which offer larger proportion of new shares to international investors, underwritten by less prestigious investment banks and with larger firm-specific return variance. Our findings are consistent with the demand inelasticity, certification effect and investor recognition arguments that account for the benefits of global offering.

Residential Investment and Business Cycles in an Open Economy: A Generalized Impulse Response Approach

We study the impact of residential and non-residential investment on economic growth using U.S. data. Unlike previous studies we include the external sector (net exports) in our estimations, and we calculate impulse response analysis using Pesaran and Shin’s (Economics Letters 58:17–29, 1998) generalized impulse response approach. We find that shocks to residential investment have a larger impact on GDP than shocks to non-residential investment, which supports the findings of the closed-economy approach of Coulson and Kim (Real Estate Economics 28:233–247, 2000). However, a closed economy model tends to overstate the importance of residential investment and understate the relevance of nonresidential investment.

Is the January effect still alive in the futures markets?

The January effect concerns the fact that small capitalization stocks have historically outperformed large capitalized stocks in January. We analyze evidence as to whether this anomaly can be exploited in the futures markets as a speculative investment or to add risk-adjusted value to portfolio performance. We find that the January effect is still alive in the futures markets on the Value Line minus S&P 500 spread trade, but that the marginal liquidity of the Value Line stock index futures contract has made it very risky to exploit the effect. Historically from 1982/3 to 2004/5, the trade has been profitable. This anomaly was also exploitable through a Russell 2000 minus S&P 500 spread trade from 1993/4 to 2004/5.

Retail Investors and the Trading of Treasury Securities

I analyze implicit transaction costs of trading government debt securities on the Spanish stock exchanges (SE) electronic trading system. The SE’s multilateral system is used mainly as an outlet for retail investors to liquidate Treasury accounts positions before maturity. I compare identical Treasury security trades on the same day in two different markets: the SE and the interdealer market. By analyzing these yield spreads I learn more about the behavior of the markdowns included in the retail prices from the institutional prices. I find evidence that these yield premia depend on traditional features to explain wholesale market liquidity premia.

Tick size change on the Stock Exchange of Thailand

This paper explores the impact of an exogenous tick size reduction on bid-ask spreads, depths, and trading volume on the Stock Exchange of Thailand (SET). On November 5, 2001, the SET implemented a tick size reduction on stocks priced below THB 25. Even though trading on SET is largely dominated by retail investors, the tick reduction produces similar empirical results found in markets where institutional investors are more dominant. Tick reduction on the SET is associated with declines in spreads, and quoted and accumulated market depths. The study finds no significant change in trading volume due to the reduction.

Takeover motives in a weak regulatory environment surrounding a market shock: a case study of New Zealand with a comparison of Gondhalekar and Bhagwat’s (2003) US findings

We examine the motives for takeovers in New Zealand surrounding the 1987 stock market crash and compare with the US findings of Gondhalekar and Bhagwat (2003). There are a number of structural differences between the New Zealand and US markets that could impact on merger motives. Compared with the US, New Zealand is a small capital market; with weak takeover regulation and a prolonged aftermath of the 1987 stock market crash. Consistent with US research, we find evidence of synergy and hubris motivations in New Zealand takeovers although we find the synergy motivation is stronger. Contrary to expectations we find no evidence of agency motivated takeovers.

Staggered Boards,Managerial Entrenchment,and Dividend Policy

Motivated by agency theory, we explore the potential impact of managerial entrenchment through staggered boards on dividend policy. The evidence suggests that firms with staggered boards are more likely to pay dividends. Among firms that pay dividends, those with staggered boards pay larger dividends. We also show that the impact of staggered boards on dividend payouts is substantially stronger (as much as two to three times larger) than the effect of all other corporate governance provisions combined. Overall, the evidence is consistent with the notion that dividends help alleviate agency conflicts. Thus, firms more vulnerable to managerial entrenchment, i.e., firms with staggered boards, rely more on dividends to mitigate agency costs. Aware of potential endogeneity, we demonstrate that staggered boards likely bring about, and are not merely associated with, larger dividend payouts. Our results are important, as they show that certain governance provisions have considerably more influence than others on critical corporate activities such as dividend payout decisions.