Institutional common ownership and firm value: Evidence from real estate investment trusts

Abstract

This paper contributes to the ongoing debate about whether and how institutional common ownership (ICO) affects firm behavior. Using a sample of equity real estate investment trusts (REITs), which provide significant advantages for isolating a monitoring channel, we find a robust and positive relation between ICO and REIT firm value. The positive relation between ICO and firm value is driven mainly by motivated investors and becomes stronger when we construct our ICO measures using blockholdings. Our difference‐in‐differences analysis, using mergers between institutional investors, suggests a causal relation exists between ICO and firm value. After investigating various channels through which ICO could affect firm behavior, we conclude that asset allocation decisions and performance are the most plausible explanations. Our finding that the monitoring associated with ICO aids managers in their portfolio disposition strategies further supports this conclusion. This enhanced monitoring leads to increased property portfolio returns, as well as more geographic diversification.

Property market liquidity and REIT liquidity

“…If improvements in REIT share liquidity caused by the increase in underlying property market liquidity lead to higher firm value, then the strategy of allocating assets to more liquid real estate markets will likely be more valuable, all else being equal. To test this prediction, we regress an REIT's value proxy on the instrumented PptyMktLiq ($${\rm{\hat {\rm T}}}_{i,y - 1}^{HP\;dist}$$): $$\begin{equation} {Q}_{i,y}=\hspace*{0.28em}\alpha \hspace*{0.28em}{\widehat{T}}_{i,y-1}^{\textit{HP}\hspace*{0.28em}\textit{dist}}+\beta {X}_{i,y-1}+{\varphi}_{i}+{\delta}_{y}+{e}_{i,y}, \end{equation}$$where $${Q_{i,y}}$$ stands for the REIT's annual Tobin's Q in year y for firm i , which has been widely used as a measure of firm valuation (Capozza & Seguin, 1999; Capozza & Seguin, 2003; Ling et al., 2021b; Riddiough & Steiner, 2020). Note that $${Q_{i,y}}$$ is defined as the ratio of market equity (stock price times the number of shares) to replacement costs.…”

“…where 𝑄 𝑖,𝑦 stands for the REIT's annual Tobin's Q in year y for firm i, which has been widely used as a measure of firm valuation (Capozza & Seguin, 1999;Capozza & Seguin, 2003;Ling et al, 2021b;Riddiough & Steiner, 2020). Note that 𝑄 𝑖,𝑦 is defined as the ratio of market equity (stock price times the number of shares) to replacement costs.…”

“…Note that 𝑄 𝑖,𝑦 is defined as the ratio of market equity (stock price times the number of shares) to replacement costs. We follow Ling et al (2021b) and calculate replacement costs as the book value of property, adding back depreciation minus book liabilities. The control variables are the same as in the previous sections.…”

Distance to Headquarter and Real Estate Equity Performance

“…The majority of the REITs in the U.S. are owned in large proportion by the largest institutional investors. As Ling et al (2020) demonstrate, more than 75% of institutional owners hold more than one REITs during the period from 2010 to 2015, which is 1.5 times higher than before 2008. Increased interest from institutional investors increases market transparency, as documented by Feng et al (2019), and hence lower the required risk premium.…”

Net asset value discounts and premiums in the maritime shipping industry

“…For example, though many equity analysts suggested the importance of a (weak)/strong management team, a (dubious)/trustworthy controlling shareholder and (small)/large market capitalisation as a factor of NAV (discount)/premium, we did not include their respective variables in the econometric analysis as they were not supported by theory-based arguments and empirical findings in the literature on NAV discounts and premiums. Likewise, though only one equity analyst pointed to a positive relationship between high institutional ownership and NAV premiums, we included this variable in our econometric analysis because the effect of institutional ownership on the quality of corporate governance and, thereby, on firm value has been anticipated in the corporate governance and firm valuation literature (Chung & Zhang, 2011;Federo et al, 2020;Ferreira & Matos, 2008;Ling et al, 2021). In a similar vein, even though (high)/low cost of capital was suggested as a determinant of NAV (discount)/ premiums only once, we included its respective variable in our model based on the wellestablished inverse relationship between firm value and investors' required rate of return on the financial securities that support a firm's operations (e.g., Berk & DeMarzo, 2016;Damodaran, 2006)…”