Insider Ownership, Risk, and Leverage in Reits

Posted: 10 Jun 2010

See all articles by Walter Dolde

Walter Dolde

University of Connecticut - Department of Finance

John D. Knopf

University of Connecticut - Department of Finance

Date Written: June 9, 2010

Abstract

We investigate the relative importance of managerial entrenchment and incentive alignment as indicated by REIT risk-taking. The two theories make contradictory predictions about the sign of the relation between insider ownership and risk. We test for the possibility of diminishing entrenchment returns to insider ownership. Empirical results for equity and asset betas soundly reject linear models in favor of nonmonotonic relations with reversals at insider ownership of 36%. Up to that point, increasingly entrenched insiders mitigate their own risk aversion. Above 36%, incentive alignment emerges as managers become more substantial owners. Leverage declines at an accelerating rate above 20% insider ownership. Together these results suggest a shift in the composition of risk, from leverage risk to asset risk, reflecting comparative advantage and a crossover in the relative monitoring costs of debt and equity. Problematically for linear models, the coefficient of insider ownership is not significant for most risk measures, producing the misleading appearance of no relation between insider ownership and risk. Institutional ownership is significantly negatively related to leverage. Thus incentives are aligned between insiders and institutional owners at insider ownership above 20%.

Keywords: REIT, managerial risk aversion, entrenchment, incentive alignment, insider ownership, institutional ownership

JEL Classification: G23, G32

Suggested Citation

Dolde, Walter and Knopf, John D., Insider Ownership, Risk, and Leverage in Reits (June 9, 2010). Journal of Real Estate Finance and Economics, Vol. 41, No. 4, 2010. Available at SSRN: https://ssrn.com/abstract=1622789

Walter Dolde (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
One Univesity Place
Stamford, CT 06901-2315
United States
203-301-0806 (Phone)

John D. Knopf

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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