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School of Real Estate and Planning
Sponsor Ownership, Board Independence and Asian REITs Performance
Annisa Dian Prima*, Simon Stevenson and Peter Wyatt
ERES 20th Annual Conference - 5 July 2013
© Henley Business School 2013
School of Real Estate & Planning
www.henley.reading.ac.uk
Introduction & Motivation
• Most Asian REITs are typically formed as captive entities by their sponsors
• Asian REITs benefit from their business group relationship with the sponsors
• Types of support provided by the REITs sponsors:
- Development pipeline: ‘right of first refusal’
- Management expertise
• Asian REITs pursue aggressive acquisition strategies: support from sponsors is
essential for future growth opportunities (Ooi et al., 2011)
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Introduction & Motivation
•
Agency conflict is exacerbated by the captive relationship between the manager
and the sponsor
•
Sponsors have substantial control over REITs management, financing and investment
policies (Wei et al., 1995)
•
Related party transactions with the sponsors are inevitable (Ooi et al., 2012)
•
REITs serve as an ‘exit strategy’ for the developer sponsor (Rosenberg, 1986; Wong et al. 2012)
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Introduction & Motivation
“…Potential conflicts of interest among the REIT, the Manager, the Sponsor and the
major Unitholders could result in corporate actions and business decisions that are
not in the Unitholder’s best interests…”
-One of the REITs prospectus“…The Manager may experience conflicts of interest as a result of the activities and
interests of its affiliates in acquiring and disposing of potential investments. As a
wholly-owned subsidiary of the Sponsor, the Manager may experience conflicts of
interests in connection with any potential acquisitions from sponsor or its affiliates,
and in agreeing the terms of such potential acquisitions... Any potential conflicts of
interest between the REIT and the Sponsor and its affiliates may not necessarily be
resolved in favour of the REIT…”
-One of the REITs prospectus-
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Research Objective
• Aim: to investigate the influence of sponsor ownership and other governance variables
on board independence and Asian REITs performance
• Kudus and Sing (2011) attempt to investigate the relationship between insider
(sponsor) ownership on board independence and Asian REITs performance
- Insider ownership as a proxy of sponsor ownership  good proxy?
- Pyramid structure of sponsor ownership
- Sample period between 2002 and 2007  exclude the financial crisis period
• Higher likelihood of sponsors expropriation during the crisis due to a negative shock on
investment opportunities and financial constraint (Johnson et al., 2000; Lemmon and Lins, 2003)
• Firm value is adversely affected when Asian REITs are involved in the related party
transactions with their sponsors during the crisis (Ooi et al., 2012)
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Literature Review
• Board Independence and Managerial Ownership – integral governance mechanisms
(Jensen and Meckling, 1976; Fama and Jensen, 1983 ; Weisbach, 1988; Capozza and Seguin, 2003)
• Entrenchment hypothesis: managerial ownership is negatively related to board
independence and firm performance
(Fama and Jensen, 1983; Ghosh and Sirmans, 2003; Kim et al., 2007)
• Incentive alignment hypothesis: managerial ownership is positively related to board
independence and firm performance
(Capozza and Seguin, 2003 ; Yeh and Woidtke, 2005)
• The countervailing forces between the incentive effect and the entrenchment effect raise
the possibility that managerial ownership is nonlinearly related to board independence
and firm performance
(Friday et al.,1999; Morck et al.,1988; Han, 2006; Dolde and Knopf, 2009; Kudus and Sing, 2011)
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Empirical Models
Board independence model:
BIndi,t = β0 + β1 SPONi,t + β2 BOARDi,t + β3 OWNi,t + β4 CEOi,t + β5 CONTROLi,t + λt +ηi + εi,t
Stock return and performance model:
ARRi,t = δ0 + δ1 SPONi,t + δ2 BOARDi,t + δ3 OWNi,t + δ4 CEOi,t + δ5 CONTROLi,t + λt +ηi +εi,t
ARRi,t is a vector of three performance measure variables, namely of:
-
Jensen’s Alpha
:
Abnormal returns
-
ROE and ROA
:
Operating efficiency
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Model Specification
Each model include 3 specifications:
1) Linear
2) Quadratic
- squared term of sponsor ownership
3) Spline
- sponsor ownership is divided into three range segments
- 0% - 5% of ownership, 5%-25 % of ownership, and > 25% of ownership
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Estimation of sponsor ownership
Partly-owned Subsidiary
Wholly-owned Subsidiary
Sponsor
Sponsor
50%
100%
Subsidiary
10%
REIT
10%
Subsidiary
5%
10%
REIT
1. Wholly-owned :
Sponsors retain a 10 percent stake in the REIT
2. Partly-owned :
Sponsors retain a 5 percent stake in the REIT
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Sample Characteristics
Sample Characteristics
Japan
Singapore
Malaysia
Hong Kong
Total
No. of existing & delisted
REITs
45
24
14
8
91
No. of REITs in the sample
42
24
14
7
87
93.33
100
100
87.50
96.67
275
132
70
37
514
Proportion of sample to
existing REITs
No. of Pooled Observations
•
Annual data from 2002 – 2012 (unbalanced panel data)
•
Corporate governance data:
Annual Reports, prospectus & other disclosed documents at corporate website
•
Financial data:
SNL Financial and Thomson Reuter’s Datastream
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Descriptive Statistics
Variable
Panel A: CEO Profile
CEO Tenure
CEO Duality
Panel B: Board Composition
Board Size
Board Independence
Panel C: Ownership Structure
CEO Ownership
Insider Ownership
Independent Ownership
Total Blockholding
Japan
Singapore
Malaysia
Hong Kong
Total
Mean
Mean
Mean
Mean
Mean
CEOTen
Dual
2.607
0.516
2.674
0.000
2.685
0.171
2.649
0.000
2.638
0.300
Bsize
Bind
3.502
66.439
7.667
45.905
6.600
40.046
7.324
42.414
5.268
55.842
CEOOwn
InsOwn
IndOwn
TotBlk
0.000
0.000
0.000
25.068
0.074
0.757
0.045
42.623
0.730
14.671
0.040
7.719
0.001
11.353
0.002
12.485
0.118
3.010
0.017
26.308
29.143
84.1
37.327
91.4
26.004
86.5
19.040
71.2
6.012
0.872
1.443
0.250
5.680
0.939
1.382
0.357
6.578
1.269
1.366
0.730
5.320
1.011
1.507
0.482
-0.428
8.507
5.647
-1.256
10.999
7.474
-0.679
9.795
5.950
-0.274
7.189
4.281
Symbol
Panel D: Sponsor Characteristic and Ownership
Sponsor Ownership
SponOwn
8.601
Sponsor Developer
Stype
57.8
Panel E: Control Variables
Firm Size (log term)
Fsize
4.725
Market to Book
MTB
1.061
Leverage (log term)
LEV
1.588
Asset Strategies
Type
0.593
Panel F: Performance Measures
Abnormal Return
Alpha
0.096
Return of Equity
ROE
5.236
School
of Real Estate & Planning
Return
on Asset
ROA
2.587
11
OLS: Board Independence and Abnormal Returns
Constant
SponOwn
SponOwn_sqr
SponOwn5
SponOwn5_25
SponOwn25
Model 1: GLS
BIND
Linear
Quadratic
Spline
66.846*** 66.990*** 65.472***
(5.736)
(5.710)
(5.830)
-0.091*
-0.094*
(0.050)
(0.051)
-0.131
(0.200)
0.316
(0.254)
-0.045
(0.100)
-0.163**
(0.081)
BInd
BSize
Dual
CEOOwn
InsOwn
TotBlk
MTB
FSize
Type
-3.286***
(0.525)
-1.530*
(0.884)
-0.269***
(0.059)
-0.094
(0.058)
0.026
(0.031)
0.005
(0.003)
-0.017**
(0.007)
-0.339
(1.572)
-3.290***
(0.527)
-1.536*
(0.887)
-0.271***
(0.059)
-0.096*
(0.058)
0.025
(0.030)
0.005
(0.003)
-0.017**
(0.008)
-0.331
(1.576)
Country F.E
Year F.E
No. Observations
514
514
School of Real0.141
Estate & Planning
R-squared
0.142
-3.312***
(0.527)
-1.695*
(0.881)
-0.231***
(0.060)
-0.081
(0.053)
0.028
(0.030)
0.005
(0.004)
-0.017**
(0.008)
-0.300
(1.559)
514
0.148
Model 2: OLS
Alpha
Linear
Quadratic
Spline
136.362
128.44
135.246
(106.275) (104.767) (108.575)
1.303** 1.501***
(0.533)
(0.543)
9.010*
(5.438)
8.049
(5.015)
-0.052
(1.234)
1.726**
(0.785)
-1.332*
-1.333*
-1.415*
(0.717)
(0.720)
(0.723)
-6.935
-6.890
-7.394
(6.016)
(6.007)
(6.093)
-7.633
-9.463
-10.911
(15.609) (15.709) (15.775)
4.022*** 4.262*** 4.341***
(1.212)
(1.215)
(1.313)
1.768**
1.901**
2.014**
(0.786)
(0.783)
(0.802)
1.097*
1.191**
1.287**
(0.578)
(0.577)
(0.594)
0.140** 0.155*** 0.142**
(0.060)
(0.060)
(0.060)
-0.028
-0.046
-0.045
(0.120)
(0.120)
(0.122)
-24.358* -23.088* -23.603*
(13.234) (13.158) (13.134)
Yes
Yes
Yes
Yes
Yes
Yes
508
508
508
0.228
0.232
0.232
12
OLS: Operating Performance
Explanatory Variable
Constant
SponOwn
Linear
5.561
(3.933)
0.076**
(0.031)
SponOwn_sqr
SponOwn5
SponOwn5_25
SponOwn25
CEOTen
CEOOwn
Country F. E.
Year F. E.
No. Observations
R-squared
0.552***
(0.171)
0.259***
(0.045)
No
Yes
514
0.187
School of Real Estate & Planning
Model 3: OLS
ROE
Quadratic
Spline
5.530
5.637
(3.972)
(3.970)
0.077**
(0.032)
0.034
(0.222)
-0.001
(0.194)
0.125**
(0.057)
0.046
(0.062)
0.552*** 0.551***
(0.172)
(0.168)
0.260*** 0.259***
(0.045)
(0.050)
No
No
Yes
Yes
514
514
0.187
0.189
Model 4: OLS
ROA
Linear
Quadratic
Spline
7.955***
7.961***
7.912***
(2.774)
(2.785)
(2.791)
0.040*
0.040*
(0.021)
(0.022)
-0.008
(0.126)
0.064
(0.117)
0.059
(0.039)
0.023
(0.038)
0.286**
0.285**
0.289**
(0.114)
(0.115)
(0.114)
0.096**
0.096**
0.100**
(0.040)
(0.040)
(0.042)
Yes
Yes
Yes
Yes
Yes
Yes
514
514
514
0.253
0.253
0.254
13
OLS: Financial Crisis
Model 5: OLS
Alpha
Explanatory Variable
Constant
SponOwn
SponOwn_sqr
Linear
-6.744
(4.577)
-0.012
(0.024)
Quadratic
-6.062
(4.574)
0.036
(0.062)
-0.001
(0.001)
Sponown5
Sponown5_25
Sponown25
BInd
-0.061
-0.061
(0.040)
(0.040)
BSize
-0.871*** -0.875***
(0.326)
(0.329)
CEOTen
0.047
0.071
(0.230)
(0.231)
CEOOwn
-0.021
-0.010
(0.042)
(0.045)
LEV
2.061
1.859
(1.283)
(1.321)
MTB
3.989***
3.997***
(0.876)
(0.881)
Country F. E.
No
No
Year F. E.
Yes
Yes
No. Observations
224
224
R-squared
School of Real Estate0.329
& Planning0.331
Model 6: OLS
ROE
Spline
-5.382
(4.528)
0.507
(0.373)
-0.05
(0.074)
-0.028
(0.029)
-0.079**
(0.039)
-0.904***
(0.319)
0.114
(0.237)
0.026
(0.060)
1.810
(1.310)
3.769***
(0.829)
No
Yes
224
0.341
Linear
12.239
(10.747)
0.163***
(0.061)
-0.039
(0.092)
-0.516
(0.521)
0.891**
(0.352)
0.291***
(0.068)
-0.781
(2.716)
-0.703
(1.759)
No
Yes
227
0.209
Quadratic
11.154
(11.122)
0.077
(0.140)
0.002
(0.003)
-0.039
(0.092)
-0.496
(0.525)
0.852**
(0.343)
0.272***
(0.070)
-0.429
(2.767)
-0.730
(1.751)
No
Yes
227
0.212
Model 7: OLS
ROA
Spline
11.29
(11.184)
0.117
(0.343)
0.117
(0.110)
0.198*
(0.113)
-0.037
(0.095)
-0.513
(0.529)
0.858**
(0.343)
0.278***
(0.075)
-0.554
(2.727)
-0.766
(1.812)
No
Yes
227
0.210
Linear
14.813**
(6.795)
0.102***
(0.036)
-0.067
(0.054)
-0.477
(0.329)
0.542**
(0.213)
0.168***
(0.043)
-3.294*
(1.863)
-0.702
(1.04)
No
Yes
227
0.263
Quadratic
14.067**
(6.818)
0.043
(0.091)
0.001
(0.002)
-0.067
(0.054)
-0.463
(0.328)
0.515**
(0.209)
0.155***
(0.048)
-3.052*
(1.825)
-0.721
(1.032)
No
Yes
227
0.267
Spline
14.091**
(6.824)
0.067
(0.213)
0.067
(0.073)
0.128**
(0.064)
-0.065
(0.055)
-0.475
(0.333)
0.517**
(0.210)
0.159***
(0.052)
-3.121*
(1.820)
-0.751
(1.062)
No
Yes
227
0.265
14
Concluding Remarks
• Sponsor ownership and board independence: nonlinear
- Monitoring abilities
• Sponsor ownership and abnormal returns: nonlinear
- Monitoring costs
- Use of private information (information asymmetry)
• Sponsor ownership and ROE: nonlinear
- Tacit knowledge
- Efforts and involvement
• Sponsor ownership and ROA: linear
- Quality of real estate assets
- Capital raising assistance
• Sponsor ownership and operating performance (ROE, ROA) during crisis: linear
- Sponsors commitment to support REITs during good time and bad time
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E-mail:
[email protected]
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