DOES THE TAKEOVER MARKET FOR REITS PENALISE INEFFICIENT MANAGERS?

Abstract

Takeover activity, or the Market for Corporate Control, has been an important external disciplinary mechanism to ensure the alignment of interests between shareholders and managers of corporations. This paper investigates the role of inefficient management in driving the REITs takeover market. Utilising a logistic regression model, 96 US-REIT targets of takeover activity between January 2000 and December 2018 were investigated to determine their probability of takeover, as a function of the prior financial performance. Results have found that the inefficient management hypothesis stands, with return on assets and total asset growth being statistically significant determinants of the takeover likelihood. These two factors were found to share a negative relationship with takeover likelihood, consistent through the 2 REIT M&A waves separated by the 2008 Global Financial Crisis. The Jenson’s Alpha, a market-based return measure, and the EBITDA margin to measure operating efficiency were not significant, contrasting prior literature from Palepu (1986) and Froese (2013) that investigated M&A activity across industries. A comparison across the 2 REIT waves have also found a significant structural shift in the takeover landscape, with total asset growth being a more prominent driver for takeovers and a diminishing impact of the return on assets on takeover likelihood.