REIT Debt Pricing and Ownership Structure

Abstract

We show that ownership by institutional investors with increased incentives to monitor decreases the cost of both public and private debt in the REIT industry. Our study focuses on four types of “incentivized” investors: long-horizon institutional investors, public pension funds, institutions with significant portfolio allocations to particular REITs (motivated institutional owners), and institutional investors that specialize in REITs. In addition, we confirm our findings using a composite index that incorporates only that part of incentivized ownership that is free from the effects of total institutional ownership. Finally, we provide evidence that some of the empirical relationships that we observe can be attributed to monitoring effects and cannot be entirely explained by the intentional selection of REITs with low agency risk into institutional portfolios.

Keywords: REITs, Cost of Debt, Institutional Ownership, Monitoring

JEL Classification: G11,G12,G14