From the Research Desk

11/6/2012 | By Calvin Schnure

Published in the May/June 2012 issue of REIT magazine.


Higher REIT Growth Rates with Greater Transparency

SOURCE:  “Corporate Transparency and Firm Growth:  Evidence from Real Estate Investment Trusts,” published in Real Estate Economics, Fall 2011.

AUTHORS:  Heng An (University of South Dakota), Douglas O. Cook and Leonard V. Zumpano (both University of Alabama).

SYNOPSIS:  These economists investigate how greater transparency helps REITs overcome frictions in equity and debt markets, finding that more transparent REITs have higher investment and growth rates. By reducing information asymmetries, greater transparency allows REITs better access to external financing at lower cost.

“Consistent with the premise that transparency facilitates investment by reducing the information costs of external financing, we find that more transparent REITs exhibit higher investment and growth rates. Separately investigating changes in equity and debt, we demonstrate that the positive association of transparency is larger and more significant in the equity market, characterized by more severe adverse selection problems, than in the debt market.

Furthermore, we show that the sensitivity of investment to cash flow is decreasing in transparency. This result is in harmony with the idea that greater transparency enables firms to raise external capital more readily with less need to rely on internal cash flows.” 

Good Governance Can Reduce Bid-Ask Spread in REIT Stock

SOURCE: “How Does Corporate Governance Affect the Quality of Investor Information?  The Curious Case of REITs,” published in Journal of Real Estate Research, January-March 2011.

AUTHORS: Paul Anglin, Robert Edelstein, Yanmin Gao and Desmod Tsang (University of Guelph, Ontario; University of California at Berkeley, University of Alberta, and McGill University, respectively)

SYNOPSIS:  The authors find that the structure and compensation of corporate boards have a significant impact on information asymmetry and corporate governance. In particular, the experience and compensation of the board of directors, and the structure and nature of the audit committee, can reduce the bid-ask spread in REIT’s stock.

“We study the link between REIT governance and information asymmetry. Good corporate governance can affect market efficiency by decreasing the level of asymmetric information between informed insiders, such as managers, and public shareholders. If insiders cannot withhold or otherwise distort public information, then shareholders may feel more confident about understanding the risks of investing, and attendant adverse selection problems. This hypothesis is significant because good governance is supposed to affect the capital markets’ processing of available information in order to ensure proper resource allocations to firms.

We generally find strong evidence that high-quality governance on the board of directors and on the audit committee significantly reduces information asymmetry. We also find that audit committee characteristics … exert the strongest influences on information asymmetry. These findings suggest that the special features of the REIT market do not completely obviate the need for good internal corporate governance.”





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