CEO overconfidence and financial policies of real estate investment trusts (REITs)

Kenneth Yung, DeQing Diane Li and Qian Susan Sun

Journal of Property Research, 2015, vol. 32, issue 4, 384-406

Abstract: This study investigates the effects of CEO overconfidence on real estate investment trust (REIT) financial policies and performance. The unique regulatory environment facing REITs make REIT financial policies less likely affected by agency problems and tax-related reasons, and thus provide a clearer picture of the effect of CEO overconfidence. In addition, the significant amounts of tangible assets of REITs provide performance measures that are relatively unbiased by unrelated elements. We find that REITs with overconfident CEOs use more debt, and in particular, longer term debt. Overconfident CEOs also buy back more shares and pay fewer dividends. CEO overconfidence does not have significant effects on REIT cash holdings. Regarding REIT performance, CEO overconfidence is negatively related to Tobin's q and return on assets, respectively. We also find that CEO overconfidence motivated leverage decisions and CEO overconfidence motivated share buybacks have significant negative effects on REIT performance. The results suggest that REITs with overconfident CEOs make mistakes in leverage and share buyback decisions. Lastly, we find that the effect of CEO overconfidence is non-linear. The results show that the effect of overconfidence comes mainly from the CEOs with higher levels of overconfidence. Our results also suggest that regulations do not have a moderating effect on CEO overconfidence.

Date: 2015
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DOI: 10.1080/09599916.2015.1088565

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