How Does Information Asymmetry Affect REIT Investments? Cost of Capital, Performance, and Executive Compensation

Abstract

This study empirically examines the impact of information asymmetry on firm-level investment behavior using data from U.S. equity real estate investment trusts (REITs). We show that firms with lower levels of information asymmetry, measured as bid–ask spread and stock return volatility, generally experience higher growth on their real estate investment, property investment, and total assets. Conversely, high-information-asymmetry REITs are less active in their property acquisition and disposition activities, as well as involved in fewer mergers and acquisitions than their counterparts. We also show that the levels of information asymmetry are, on average, positively related to capital costs and negatively related to operational performance. Lastly, the study sheds light on the importance of aligning interests of managers with those of stakeholders, by illustrating that executives in firms with a high level of information asymmetry receive higher total compensation compared with their peers.