Taxes, Mispricing, or the Agency Cost of Managerial Discretion? Evidence from Corporation to REIT Conversions

Naresh Gopal (), Ravi S. Mateti (), Duong Nguyen and Gopola Vasudevan ()
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Naresh Gopal: Indian Institute of Management Ranchi, India
Ravi S. Mateti: Concordia University, Canada
Duong Nguyen: University of Massachusetts Dartmouth, USA
Gopola Vasudevan: University of Massachusetts Dartmouth, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 01, 1-35

Abstract: We study the effect of change in the organizational structure from a corporation to a real estate investment trust (REIT) on the firm value. Changing the organizational structure from a corporation to a REIT could result in an increase in the firm value, and some companies may be motivated to change their organizational structure because of this. We examine three possible sources of gains in the firm value from such a change in the organizational structure. They are the potential tax savings, reduction in agency costs of managerial discretion, and increase in the price multiples after the conversion. We examine the changes in the firm value of firms that announce conversion to a REIT during 1990–2016. We find that the announcement period returns are positive and strongly significant. Consistent with the tax hypothesis, the announcement period returns are positively related to the effective tax rate of the sample firms. Consistent with the managerial discretion hypothesis, the announcement period returns are positively related to the level of free cash flow of low growth firms. Consistent with the mis-valuation hypothesis, the announcement period returns are higher when REIT valuations are higher relative to the sample firms.

Keywords: Corporations; REITs; agency cost; taxes; firm valuation; payout policy (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219091521500077

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