Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle

  • Dennis R. Capozza
  • Paul J. Seguin

DOI: 10.1023/A:1007869019657

Cite this article as:
Capozza, D.R. & Seguin, P.J. The Journal of Real Estate Finance and Economics (2000) 20: 91. doi:10.1023/A:1007869019657


This study investigates why externally advised real estate investment trusts (REITs) underperform their internally managed counterparts. Consistent with previous studies, we find that REITs managed by external advisors underperform internally managed ones by over 7 percent per year. Property-level cash-flow yields are similar between the two managerial forms, but corporate-level expenses and especially interest expenses are responsible for lower levels of cash available to shareholders in externally advised REITs. We document that the higher-interest expenses are due to both higher levels of debt and to higher debt yields for externally advised REITs. We posit that compensating managers based on either assets under management or on property-level cash flows creates incentives for managers to increase the asset base by issuing debt even if the interest costs are unfavorable.

agency costs executive compensation real estate investment trusts 

Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Dennis R. Capozza
    • 1
  • Paul J. Seguin
    • 2
  1. 1.University of Michigan Business SchoolAnn Arbor
  2. 2.Carlson School of ManagementMinneapolis

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