The impact of corporate governance and strategies on the performance of indirect real estate : investors' perception and the reality

Abstract

Indirect real estate (IRE) refers to listed property companies and IRE performance in this empirical research refers to long term share price performance against a portfolio of assets attributable by long term observations of the respective property companies’ corporate governance and strategies. This study investigates three related issue regarding IRE: First, how corporate governance and strategies of IRE affect its share price performance. Second, whether the impact, if any, is consistent with investor’s perceptions. Third whether investors can earn excess return based on public information about the corporate governance and strategies of IRE.

The results of this empirical research are of academic and practical importance. First, it tests the validity of prevailing belief amongst academicians and investors that better corporate governance and strategies can enhance market value of IRE thus leading to better share price performance. In particular this study tests the impact of different attributes of corporate governance and strategies of an IRE on its share price performance. The results of this study suggest that property type and geographical diversification has no impact on performance of the IRE. It is found that the impact of the stock of immediately developable land on share price performance is positive but the stock of land that is not readily developable land had no impact. We also find that the percentage of shares held by the board of directors had negative impact on IRE share price performance. These results align with those in many previous studies. Consistent with previous studies, it is found that the consistent dividend policy, separation of Board Chairman from CEO,current asset to current liability ratio, interest coverage ratio, WACC, ROA, ROE, market value to book ratio have significant impact on share price performance. The results show that proportion of income from property has a positive impact on IRE share price performance, which does not support the strategy of diversification to non-real estate business.

Second, even though most investors believe that corporate governance and strategies are important determinants of share price performance, there has been very little empirical research on how investors perceive relative importance of different attributes of corporate governance and strategies in terms of their impact on share price performance. Even more importantly, whether investor’s perceptions are consistent with real life facts is unknown. The results of this study suggest that there is no correlation between investors’ perception of the relative importance of different attributes of corporate governance and strategies and their actual impact on share price performance.

Finally, the Efficient Market Hypothesis (EMH) predicts that public information cannot be used to earn excess returns. Empirical evidence from this study suggests that public information of corporate governance and strategies has small but significant predictive power on future share price performance even though investors’ perception of the importance of these attributes are not consistent with the reality. This finding casts doubts on the EMH. The empirical findings on the impact of individual attribute of corporate governance and strategies can be used to rectify investors’ subjective bias and assist them to better analyze public information of corporate governance and strategies and thus increase their chance of earning excess return in the IRE market.