OWNERSHIP STRUCTURE AND FIRM VALUE : A CASE OF US REITS

Abstract

This study investigates the relation between ownership structure and firm value proxied by Tobin’s Q for US REITs over the period of 1995 to 2008. Ownership variables investigated includes insider, institutional and outside block ownership. Understanding the possible endogeneity problems and non-linearity between ownership and performance, different specifications including linear, quadratic and piecewise linear and functional forms like Pooled OLS, 2SLS and fixed effect estimators are used in this study The relevance of this study is driven first by drastic ownership changes with increasing institutional ownership and concentration of ownership since the relaxation of “five or fewer” rule and second, weaker governance due to unique REIT regulations. This has sparked the interest to investigate the effect of corporate governance caused by these ownership and regulatory changes. With regards to the findings, it is revealed that higher insider ownership is associated with lower firm values, suggesting strong entrenchment effects. Piecewise regressions highlighted that this negative relation became milder beyond 5% level, suggesting the interaction of incentive alignment effects and entrenchment effects. Positive relationship between institutional ownership and firm value suggests that institutional owners are able to better monitor to enhance firm performance. However, further analysis indicates no monitoring benefits conferred by higher institutional ownership, suggesting other benefits like positive reputation effect on REITs. Likewise, number of block holders are positively related with firm value, while block ownership is negatively related, questioning the wisdom of concentrated ownership within REITs. Contrary to institutional investors, significant monitoring benefits are conferred with more block holders and less concentration in ownership.