REIT Resiliency and Corporate Governance

Abstract

A strong argument can be made that we have just witnessed perhaps the greatest test the REIT industry will ever face in terms of survival. REITs were mired in debt and troubles in late 2008 and early 2009. However, in 2009 the industry as a whole was able to raise over $30 billion in secondary offering, unsecured debt financings, and IPOs the most equity the REIT industry has ever raised in any one year in REIT history other than 1997. Statistically, then, we should be able to use whether REITs were able to access capital in 2009 as a survivor test. Long-term survivors and winners would be those REITs able to raise capital and the losers would be those REITs unable to gain access to new capital. In turn, we should be able use this data to test whether good corporate REIT governance is correlated with firm survivorship. Further, we should be able to use these results to look back at previous years to determine whether investors are prone to errors in terms of differentiating REITs by type of survivorship. We propose different empirical metrics (including corporate governance, stock price synchronicity, transparency, liquidity, and volatility) in identifying long-run survivorship and resiliency against financial crises and fears. We then use the above metrics and recent crises as the natural experiment in testing various implications of survivorship, including: the probability of external financing, post-equity offering performances, managerial incentives, and stock markets ability to distinguish long-term survivors and winners.