Geographic Proximity and Managerial Alignment: Evidence from Asset Sell-Offs by Real Estate Investment Trusts

Abstract

While the relation between geographic dispersion and firm value has been extensively studied, there are intriguing aspects that we do not yet understand. For example, Bernile, Kumar and Sulaeman (2015) report that, “local investors may perceive an informational advantage where there is in fact none.” Additionally, when we talk of local assets versus distant assets, there is little data showing what that means. REITs offer a unique and more complete data source of evidence about the proximity issue and value. In our unique panel dataset of more than 800,000 property-year observations, we find that local must be carefully evaluated as in most cases these REITs own a wide pool of geographically diversified assets. We apply a two-stage sequential choice model to mitigate selection bias at the firm-level and property-level. We find that REITs tend to dispose of distant properties and there is a negative relation between distance and cumulative abnormal returns. The top-ten MSAs in our disposition sample were over 860 miles (1,388 kilometers) from their REIT headquarters (HQs). The average cumulative abnormal return (CAR) was over three times as large and statistically significant for those dispositions that were below the median distance compared to those farther. However, further analyses show that headquarters that were in smaller areas (below the mean by population) were the only REITs to have positive abnormal returns. Thus, the gain is to firms that are located in smaller areas and who dispose of properties closer to their HQs. The gains are monotonically declining by distance from their HQs. This evidence is supportive of managerial alignment theory in the literature.Further, informational and social factors explain corporate decisions on asset sell-offs: this social interaction effect exists for those HQs located in less-populated areas. Consistent with the hypothesis of Landier, Nair and Wulf (2009), we find a positive and significant relation between aggregated proximity of a firm’s property holdings (Geographic HHI) and employee friendliness, indicating proximity between a particular firm’s headquarters and its underlying properties is associated with poor shareholder protection due to better employee protection. Together, these findings suggest a dominant role for the managerial alignment hypothesis. We find in particular that for HQs in less-populated MSAs, the managerial alignment effect dominates the information asymmetry effect.