The Effect of Corporate Governance on Investment: Evidence from Real Estate Investment Trusts (REITs)

Abstract

This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of Real Estate Investment Trusts (REITs). Since REITs provide a relatively accurate measure of Tobin's q, a transparent structure, and generally less asymmetric information about their investment opportunities, they provide an especially good sample to evaluate these issues. We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership, or lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies, and with high insider ownership allowing managers to follow their own investment agendas.