REIT Characteristics and the Sensitivity of REIT Returns

Previous research on the returns to real estate investment trusts (REITs) has considered whether REITs are systematically exposed to general stock-market risk and interest-rate risk. This study examines how the sensitivity of REIT returns to these factors may be influenced by various REIT characteristics. Using a sample of publicly traded REITs, we estimate the sensitivity of REIT returns to stock market and interest-rate changes. We then propose and implement a model for testing whether differences in asset structure, financial leverage, management strategy, and degree of specialization in the REIT portfolios are related to their sensitivity to interest rate and market risk. Our results permit us to offer some inferences about how REITs can alter their risk exposure by managing these characteristics.     

Audit committee accounting expertise,expectations management,and nonnegative earnings surprises

We investigate whether accounting expertise on audit committees curtails expectations management to avoid negative earnings surprises. Controlling for the endogenous choice of an accounting expert, we find that firms with an accounting expert serving on the audit committee exhibit: (1) less expectations management to avoid negative earnings surprises; (2) less nonnegative earnings surprises through expectations management; and (3) more nonnegative earnings surprises that are less susceptible to manipulations of both realized earnings and earnings expectations. We find, however, that the inclusion of an accounting expert on the audit committee curtails expectations management only in the interim quarters. While Brown and Pinello (2007) find a greater magnitude of downward revisions in analysts’ forecasts in the fourth quarter, they also document a lower incidence of nonnegative earnings surprises. Together, this suggests that with an accounting expert, audit committees likely view the fourth quarter downward revisions as driven more by guidance than by manipulation, thus focusing on curbing only expectations management in interim quarters.     

Why do managers avoid EPS dilution? Evidence from debt–equity choice

Survey evidence reveals that managers prefer to avoid dilution of earnings per share (EPS), though financial theory suggests it is irrelevant in firm valuation. We explore contracting and behavioral explanations for this apparent paradox using a large sample of debt–equity issuers. We first provide evidence that firms with greater agency conflicts between managers and shareholders are more likely to use EPS as a performance measure in bonus contracts. After controlling for possible endogeneity related to compensation contract design, we find that managers are more likely to avoid earnings dilution when their bonus compensation explicitly depends upon EPS performance. This effect is increasing in the magnitude of bonus compensation for this subset of firms; we document no such associations for the firms that do not use EPS in setting bonus pay. Additional tests of firms’ speed of adjustment to target leverage ratios and firms’ debt conservatism levels indicate that explicitly rewarding executives on EPS performance helps to resolve underleveraging problems. We also find that clientele effects are associated with managers’ aversion to earnings dilution. Our findings provide a deeper understanding of the factors that underlie the use of accounting performance in compensation contracts and new evidence on the implications of the contracting role of accounting in firm decision-making.