Does firm governance affect institutional investment? Evidence from real estate investment trusts

Lisa A. C. Frank and Chinmoy Ghosh

Applied Financial Economics, 2012, vol. 22, issue 13, 1063-1078

Abstract: Institutional investors typically hold large blocks of assets and are thus thought capable of realizing the benefits of monitoring managers’ activities. Yet, the Real Estate Investment Trust (REIT) environment is characterized by high free-rider costs and low incentives to monitor. Given this environment, institutions may choose to invest in firms with beneficial governance mechanisms in place. This study examines the impact of board composition and Chief Executive Officer (CEO) influence on the level of institutional investment and asks whether the existence of beneficial governance mechanisms is important in determining which REITs attract investment. After conducting Ordinary Least Squares (OLS) regressions, a quasi-maximum likelihood model is estimated to resolve the problems associated with linear estimation of a fractional dependent variable. Robustness checks include re-estimating the models with the sample split into three size panels, and employing instrumental variables to control for potential endogeneity effects. The results are consistent with a preference for greater liquidity, increased free cash flow, less debt and lower dividend yield. Institutional investment is greater when boards of directors are busier and less tenured, which supports a preference for well connected yet less entrenched directors. Institutions prefer less equity ownership by the CEO, indicative of a preference for reduced CEO influence and increased governance.

Date: 2012
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DOI: 10.1080/09603107.2011.639733

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