How Does Information Asymmetry Affect REIT Investments? Cost of Capital, Performance, and Executive Compensation

Abstract

This study empirically examines the impact of information asymmetry on the firm-level investment behaviors using the information on U.S. equity real estate investment trusts (REITs). We show that firms with lower levels of information asymmetry, measured as bid-ask spread and stock return volatility, generally experience higher growth on their real estate investment, property investment, and total assets. Those high information asymmetry REITs are also less active in their property acquisition and disposition activities, as well as involve in fewer mergers and acquisitions. Moreover, the paper provides evidence that the levels of information asymmetry are, on average, positively related to the cost of capital, and negatively related to operational performance. Lastly, the study sheds light on the importance of aligning interests of managers with those of stakeholders, by illustrating that executives in firms with a high level of information asymmetry receive higher total pays compared with their pairs.

Keywords: information asymmetry, investments, firm growth, cost of capital, REIT

JEL Classification: R3