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Corporate Governance and Performance in the Market for Corporate Control: The Case of REITs

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Abstract

We examine 132 mergers and acquisitions by Real Estate Investment Trusts (REITs) during 1997–2006 and explore the relationship between acquirer external and internal corporate governance mechanisms and announcement abnormal returns. We argue that in regulated industries with absent active takeover market, the importance of outside governance mechanisms is diminished and substituted by internal governance controls. We focus on the REIT industry. We find that bidder returns are higher for REITs with smaller boards, with more experienced CEOs, but with shorter tenure. Acquirers’ announcement returns are also significantly and positively related to higher ownership by their CEOs and board directors. We find no significant relationship between presence of staggered board and abnormal bidder returns, which supports our hypothesis that anti-takeover defense measures have reduced importance for REITs.

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Notes

  1. See Fama and Jensen (1983), Yermack (1996), Byrd and Hickman (1992) and Masulis et al. 2007).

  2. Several studies have examined the stock price effects of mergers and acquisitions in the REIT sector. In an early study of public-public REIT mergers, Allen and Sirmans (1987) find that, contrary to the results for conventional firms, abnormal shareholder returns for REIT acquirers are significantly positive. However, in a study of REIT mergers 1994–1998, Campbell et al. (2001) find that acquirer returns are small but significantly negative at −0.6%. In studies of REIT mergers in which the target is privately held, the effect is reversed, and acquirer returns are significantly positive in the 2% range (Campbell et al. 2001, 2005). This result is consistent with the evidence on public-private mergers for conventional firms (Chang 1998).

  3. Indeed, recently there has been a trend toward bigger boards for larger companies. For example, a survey of more than 1,000 CEOs and directors of large US corporations reports that the typical board has eleven directors, nine of whom are outsiders (Ferry 1999).

  4. The effect of ownership on firm value is non-linear. Ownership beyond a certain level may give CEO excessive power to ignore any monitoring by the board. We discuss this effect in more detail later in the paper.

  5. CEOOWN is not included as an independent variable in models 2 and 4 because CEO ownership is included in DIRMNGOWN, the percentage of stock beneficial ownership by all directors and executives of the company.

  6. These results are available from the authors on request.

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Acknowledgements

We gratefully acknowledge the comments of Crocker Liu, Brent Ambrose, participants in the 2007 European Real Estate Society Conference, 2008 Asian Real Estate Society Meeting, our discussant, David Downs; conference participants in the 2008 International AREUEA Meeting; Nils Kok, and Desmond Tsang. We thank Patrick Chan and Yawei Yang for their excellent research assistance.

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Authors and Affiliations

  1. Department of Finance, 134 Hofstra University, Hempstead, NY, 11549-1333, USA

    Robert D. Campbell

  2. Department of Finance, University of Connecticut, Storrs, CT, 06269, USA

    Chinmoy Ghosh

  3. Department of Finance, Whitman School of Management, Syracuse University, Syracuse, NY, 13244, USA

    Milena Petrova

  4. Department of Risk Management/Insurance, Real Estate and Business Law, Florida State University, Tallahassee, FL, 32306, USA

    C. F. Sirmans

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  1. Robert D. Campbell
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  2. Chinmoy Ghosh
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  4. C. F. Sirmans
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Correspondence to Milena Petrova.

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Campbell, R.D., Ghosh, C., Petrova, M. et al. Corporate Governance and Performance in the Market for Corporate Control: The Case of REITs. J Real Estate Finan Econ 42, 451–480 (2011). https://doi.org/10.1007/s11146-009-9202-2

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