Managerial decision horizon and real estate investment trusts (REITs)

Abstract

Purpose The purpose of this paper is to examine the effects of managerial decision horizon (MDH) on real estate investment trust (REIT) behavior and performance. Design/methodology/approach In this study, the authors expand the number of proxies and measure managerial horizon by CEO age, CEO tenure, cash compensation relative to total compensation, and the amount of vested equity-based compensation to total compensation. To avoid potential measurement error, the authors compute the average ranking score of the four individual measures to determine the overall MDH of a CEO. Cross-sectional time series regressions are then performed on the effects of CEO MDH on REIT policies and performance. The authors also examine if the effect of myopic MDH can be mitigated by good corporate governance. For robustness purpose, the authors also compare the effects of age-related MDH and compensation-related MDH. Findings The results show that REITs managed by CEOs with short MDHs have lower levels of asset growth and a lower standard deviation of return on assets. These REITs also have lower debt levels, lower dividend payouts, and hold more cash. The results suggest that short-horizon CEOs have incentives to lower investment risk, default risk, and liquidity risk at the firm level in order to protect personal benefits. CEOs with a short horizon also have a negative impact on REIT performance. The results also show that CEO compensation-related horizon problems are mitigated by corporate governance, but CEO age-related horizon problems are significant and persistent. The results suggest that age-related behavioral biases of the CEO are important determinants of corporate decisions. Practical implications The results of this study suggest that the managerial behavioral biases should be considered in understanding firm behavior. Originality/value This is the first study that examines the effects of MDH on REIT behavior and performance. The unique regulatory environment of REITs makes them less susceptible to agency problems of free cash flow and thus provides a clearer picture of the effect of MDH. Prior studies focus on the effect of managerial horizon on firm investment activity, this study expands the scope to examine the effects on investment and financial policies. In addition, this study adds to the literature by showing that the effect of age-related horizon problems may not be mitigated by good corporate governance.

Literature Review on REITs and Islamic REITs and Lessons Learned for Islamic REITs in Indonesia

“…One of the most common scope ofstudies in REITs performance is comparing performance of one or some REITs companies within one jurisdiction (Akinsomi, Ong, Ibrahim, & Newell, 2016;Aro-gordon, 2015;Asteriou & Beigazi, 2013;Bene, Anderson, & Zumpano, 2009;Brown, 2000;Compton, Johnson, Kunkel, & Compton, 2006;Escobari & Jafarinejad, 2016;Hartzell, Kallberg, & Liu, 2008;Hartzell, Sun, & Titman, 2014;Ho & Tay, 2016;Huerta, Jackson, & Ngo, 2015;Larson, 2005;C. Lee, Chien, & Lin, 2012;Liow & Addae-dapaah, 2010;Lu, Chen, & Liao, 2014;Olanrele, Said, & Daud, 2014;Pellerin et al, 2013;Quek & Ong, 2008;San, Heng, & Pong, 2011;Yung, Li, & Jian, 2017), with USA market is the most studied so far, which is not surprising because USA REITs market is the mature one in the world. One example is a study by (Brown, 2000) found that mortgage REITs that financed real estate investment using financial leverage had deeper negative returns compared to equity REITs that financed the investment directly.…”