Institutional Investors and Firm Efficiency of Real Estate Investment Trusts

Posted: 8 Jul 2012

See all articles by Richard Chung

Richard Chung

The Hong Kong Polytechnic University

Scott Fung

California State University, East Bay

Kathy Hung

California State University, East Bay

Date Written: July 5, 2012

Abstract

This study investigates the effect of insitutional ownership on improving firm efficiency of equity REAL Estate Investment Trusts (REITSs), using a stochastic frontier approach. Firm inefficiency is estimated by comparing a benchmark Tobin's Q of a hypothetical value-maximizing firm to the firm's actual Q. We find that the average inefficiency of equity REITs is around 45.5%, and that institutional ownership can improve the firm's corporate governance, and hence reduce firm inefficiency. Moreover, we highlight the importance of heterogeneity in institutional investors - certain types of institutional investors such as long-term, active, and top-five institutional investors, and investment advisors are more effective institutional investors in reducing firm inefficiency; whereas hedge funds and pension funds seem to aggravate the problem. In sub-sample analysis, we find that these effective institutional investors can reduce inefficiency more effectively for distressed REITS, and for REITs with high information asymmetry, and with longer term lease contracts. Lastly, we find that the negative impact of institutional ownership (except for long-term institutional investors) on firm inefficiency reduces over time, possibly due to strengthened corporate governance and regulatory environment in the REIT industry.

Keywords: Institutional investors, Corporate governance, Stochastic frontier analysis, REITs

Suggested Citation

Chung, Richard and Fung, Scott Siu Kuen and Hung, Kathy, Institutional Investors and Firm Efficiency of Real Estate Investment Trusts (July 5, 2012). Journal of Real Estate Finance and Economics, Vol. 45, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2101337

Richard Chung

The Hong Kong Polytechnic University ( email )

School of Accounting & Finance
Hung Hom, Kowloon
Hong Kong

Scott Siu Kuen Fung

California State University, East Bay ( email )

25800 Carlos Bee Boulevard
Hayward, CA 94542
United States

Kathy Hung (Contact Author)

California State University, East Bay ( email )

25800 Carlos Bee Boulevard
College of Business and Economics
Hayward, CA 94542
United States
510-885-4175 (Phone)
510-885-4796 (Fax)

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