Manipulation in U.S. REIT Investment Performance Evaluation: Empirical Evidence

Abstract

We investigate whether Real Estate Investment Trust (REIT) managers actively manipulate performance measures in spite of the strict regulation under the REIT regime. We provide empirical evidence that is consistent with this hypothesis. Specifically, manipulation strategies may rely on the opportunistic use of leverage. However, manipulation does not appear to be uniform across REIT sectors and seems to become more common as the level of competition in the underlying property sector increases. We employ a set of commonly used traditional performance measures and a recently developed manipulation-proof measure (MPPM, Goetzmann, Ingersoll, Spiegel, and Welch (2007)) to evaluate the performance of 147 REITs from seven different property sectors over the period 1991-2009. Our findings suggest that the existing REIT regulation may fail to mitigate a substantial agency conflict and that investors can benefit from evaluating return information carefully in order to avoid potentially manipulative funds.

Joint Leverage and Maturity Choices in Real Estate Firms: The Role of the REIT Status

“…Overall, the capital structure choices of REITs appear to be more offensive than those of non-REITs as the regulatory setting renders the mitigation of corporate taxation obsolete, reduces agency conflicts, helps manage refinancing risk and thus frees up flexibility in the capital structure to signal firm quality and optimise transaction costs. This interpretation is consistent with Alcock, Glascock, and Steiner (2012) who argue that REITs opportunistically employ leverage to enhance performance measures. Our results suggest that the relationship between leverage and maturity can also be used to moderate the effects of exogenous financing policies.…”

The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

“…Alcock et al [2012] find evidence consistent with this hypothesis in a sample of U.S. REIT firms. We examine the evidence of (capital structure) market timing in private equity real estate funds.…”

Unexpected Inflation, Capital Structure, and Real Risk‐adjusted Firm Performance

“…Alcock et al () find that REITs use debt to signal firm quality and optimize transaction costs. Alcock et al () suggest that REITs employ leverage to manage market exposure and modify risk‐adjusted performance. In spite of these numerous suggestions for the drivers of REIT capital structure decisions, Harrison et al () conclude that a closer investigation and better understanding of the leverage choices of these firms is needed.…”