The Impact of Corporate Governance on the Performance of REITs

Abstract

The authors examine the relationship between the “external” governance index (G-Index) developed in a 2003 study Gompers et al. and performance of REITs in 2004 and 2006. The G-Index is a sum of takeover barriers instituted by individual REITs, and antitakeover provisions in the state of a firm's incorporation. For the sample of REITs studies, the G-Index ranges from 3 to 13, with an average of 8. When compared to firms in general, shareholder rights in REITs are stronger than unregulated firms. The analysis shows, as expected, a significantly negative impact of G-Index on REIT performance for 2004. However, the effect is diminished in 2006. The authors contend that this is due to the G-Index of REITs increasing between 2004 and 2006, creating clustering around the mean value in 2006. This would render the G-Index less important when comparing performance across firms. In view of the fact that hostile takeovers are rare among REITs, the low G-Index and the irrelevance of G-Index in more recent times suggests that external governance is ineffective for REITs. Thus, more attention should be paid to the efficacy to internal governance mechanisms.