Corporate Governance and Performance: The REIT Effect

Rob Bauer Piet Eichholtz‡ Nils Kok

Keywords: REITs, corporate governance, firm value, performance JEL: G12, G34, G38

Bauer is with Maastricht University and Netspar, Eichholtz is with Maastricht University and Netspar and Kok is with Maastricht University, all in the Netherlands. The authors acknowledge the helpful comments of David Downs, Peter Englund, Erasmo Giambona, Martin Hoesli, Seow Eng Ong, Tim Riddiough and an anonymous referee, as well as seminar and conference participants at the University of Amsterdam, National University of Singapore, the INQUIRE Europe 2007 Autumn Seminar, and the 2007 International AREUEA Meeting. We thank RiskMetrics for providing the governance data. All remaining errors are ours. ‡Correspondence to: Piet Eichholtz, Maastricht University, Faculty of Economics and Business Administration, Department of Finance, PO Box 616 6200MD Maastricht, the Netherlands. Phone: +31(0)43 3883838. Fax: +31(0)43 3884875. Mail: P.Eichholtz@finance.unimaas.nl.

Corporate Governance and Performance: The REIT Effect

Abstract 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