The Nonmonotonic Relation between Insider Ownership and REIT Risk-Taking and Returns

Abstract

We examine empirically the relations between REIT insider ownership and several measures of performance and management decisions. Three variables exhibit U-shaped or inverted U-shaped profiles, with a critical turn at about 30% ownership. Incentive alignment appears to dominate above 30% ownership; risk aversion and entrenchment dominate from zero to 30%. These phenomena are most pronounced for stock beta and property type concentration. Linear models are inadequate to explain the data, misleadingly indicating the absence of a relationship. Leverage presents an inverted U-shape. G&A expense ratios decline nonlinearly in insider ownership. Institutional ownership is associated with lower leverage, lower expenses, lower ROA, and higher stock returns.

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

JEL Classification: G23, G32