The effect of corporate governance on the performance of REITs : the evidence from Hong Kong and Singapore

Abstract

The Asian REIT market has been developing quickly in recent years and gradually attracted attention of international investors. However, compared with other developed markets such as the US and Australia, very little is known about the Asian REIT market. This research examines the impact of the quality of corporate governance on the performance of two major and similar REIT markets - Hong Kong and Singapore.

In this research, the quality of corporate governance is measured by a scoring system that is based on the APREA Corporate Governance Scoring Framework (APREA CGSF) developed by Lecomte and Ooi (2012) for Singapore REITs but modified to suit the characteristics and regulatory requirements of both Hong Kong and Singapore REIT markets. Firm performance is measured by Tobin’s Q.

The empirical analysis is based on panel data during 2007-2011 from Hong Kong and Singapore REIT markets. The empirical results show that the quality of corporate governance (as measured by the Integrated Corporate Governance Index or ICGI) has a significant and positive impact on firm performance, holding other factors constant. However, closer examination shows that only about 20% of all the governance provisions included in the ICGI have significant impact on firm performance. This research also finds that REITs with corporate governance that takes into consideration of the interests of other stakeholders in addition to those of the shareholders (such as provision for corporate social responsibility) do not perform better.

Incidentally, the empirical results strongly suggest that Singapore REITs perform better than Hong Kong REITs after controlling for all known factors including the quality of corporate governance. This result calls for a deeper explanation. A more detailed study from a new institutional economics perspective may shed light on this issue.