1. Corporate Governance, Institutional Ownership and their
Effect on Financial Performance: Evidence from US
Equity REITs
Supervised by: Prof. Dr. Joseph McCahery
Prepared by: Alfio Shkreta

2. Relevance Summary Statistics
Variable Average Median S.D. LowValue HighValue Skewness
BRDSIZE 8.28 8.00 1.74 5.00 13.00 0.13
NMOUTSIDER 7.11 7.00 1.67 4.00 11.00 0.21
PCTOUTSIDER 85.50% 87.50% 6.21% 62.50% 100.00% -1.24
TENUREBRD 9.74 9.00 3.90 2.00 24.00 0.79
WOMENBRD 0.79 1.00 0.85 3.00 3.00 0.83
TENUREWOMEN 5.38 4.00 5.27 0.00 19.00 1.16
STGRDBRD 0.30 0.00 0.46 0.91
CEO_AGE 55.90 56.00 8.31 34.00 81.00 0.42
CEO_TENURE 8.92 8.00 6.13 0.00 26.00 0.55
CEO_CHAIRMAN 0.39 0.00 0.50 0.46
CEO_FOUNDER 0.10 0.00 0.31 2.62
CEO_CHAIRMAN_FOUNDER 0.08 0.00 0.27 3.24
ROAA 2.01% 2.01% 3.04% -4.89% 14.62% 1.01
ROAE 4.59% 5.72% 13.11% -50.51% 85.59% 1.34
MARKETCAP 2,847.2 1,585.6 4083.92565 12.3 27,319.8 3.20
TD/TA 0.53% 0.56% 0.19% 0.00% 1.11% -0.49
INSIDER_OWN 7.56% 2.29% 0.12 0.25% 64.20% 2.82
INSTITUT_OWN 32.30% 34.75% 0.11 0.00% 49.56% -1.22

3. Build - up
 Study sample: 105 U.S. Equity Real Estate Investment Trusts (REITs)
Time frame: 2007 - 2012
 Hand collected data
 SNL Database
 Annual Reports
 Literature review
 Corporate Governance
 Institutional Ownership
 Methodology
 Univariate regression
 Multivariate regression
 Pooled OLS regression
 Two main findings
 1- Corporate governance and the inclusion of women in the board of directors have a positive and
statistically significant impact on firm performance
 2- Institutional ownership, in levels between 30% and 50%, is associated with higher financial returns, both
in terms of ROA and ROE

4. Literature review – Corporate Governance
Positive Effect Negative Effect
 Bauer et al (2009) used a sample of 5000 U.S. companies and
found strong and positive relation between corporate
governance and financial performance
 Gompers et al (2003) concluded that a qualitative corporate
governance environment would lead to shareholder wealth
maximization. Core et al (2006) conducted a similar research
and reached the same conclusion
 Feng et al (2005) constructed a corporate governance using as
inputs the size of the board, the presence of outside directors
and CEO duality. The result showed that high corporate
governance scores are associated with 5-year higher returns
on assets
 Nielsen and Huse (2010) acknowledge the positive effect of
women presence in the board of directors on financial
performance of entities. Rose (2007) confirms the findings
 Sirmans (1998) reports a positive relationship between the
performance of the entity and a large independent director
representation
 Eisenberg et al (1998) concluded that firms with small boards
have better financial ratios and present a stronger monitoring
to Chief Executive Officers
 Bauer et al (2009) constructed a sub-category out of their
sample of 5000 U.S. firms composed out of REITs. They
concluded that corporate governance does not have any effect
on this form of entity, in terms of financial performance
 Hermalin and Weisbach (2003) concluded that there is little to
suggest that board composition has any cross-sectional
relationship with firm performance
 Jensen (1993) found that the presence of large boards, even
independent composed ones, suffer from the lack of
cohesiveness and coordination. The notion of the a large
board being less effective in monitoring management was
proved by Campbell et al (2009)
 Bhagat and Black (2002) conducted a research that stretches
from the early 1980s to the beginning of the early 200s. They
concluded that the impact of the board of directors on
performance is anything but resolved
 Feng et al (2005) argue that the presence of outside directors
has a weak impact on firm performance
 Ghosh and Sirmans (2003) bring further evidence of a weal
relation between the presence of independent directors, block
ownership and financial performance

5. Literature review – Institutional Ownership
Positive Effect Negative Effect
 Chan et al (1998) documented that institutional investors have
invested more in REITs that they have in any other type of
stock and the impact has been positive on firm performance
 Shleifer and Vishny (1986) recognized the greater incentives
that institutional investors have to monitor the management
because the investment of the former is much more lager
 Grossman and Hart (1980) were among the first to argue that
monitoring costs are a crucial aspect of investment decisions
and institutional investors are adequately equipped to recoup
such investments
 Nesbitt (1994) and Smith (1996) have tested the effect of
institutional ownership on firm performance and have
concluded that constant monitoring will limit managers ability
to engage in deviant behavior
 McConnell and Servaes (1990) tested the effect of institutional
ownership and firm performance and found a positive relation
as measured by the Tobin’s Q
 According to Ling and Ryngaert (1997) the presence of
institutional holders would facilitate takeovers and also the
reputational benefits would facilitate entry in the capital
markets, ultimately lowering borrowing costs
 Graves and Waddock (1994) found in their study that an
increase in the level of institutional ownership has resulted in a
decline in the performance of American companies
 Maug (1998) argue that monitoring and enforceability from
institutional holders will be proportional to the size of shares
they control. That could lead to a decrease in the marketability
of shares and lower valuations
 Coffee (1991) and Demirag (1998) concluded that institutional
investors will engage in buy – sell strategies if they are
profitable and will not engage in proper monitoring
 Agrawal and Knoeber (1996) and Faccio and Lasfer (2000)
could not find any significant relation between the
performance of companies and the presence of institutional
holders
REIT Requirements
 5 – 50 Rule: No more than 100 individuals / institutions can
own more than 50% of the outstanding shares of a REIT
 Ownership test: A REIT must have at least 100 different owners
of its outstanding shares

6. Hypotheses
Hypothesis I
 Because the literature has no consensus on the effect of corporate governance I will develop a Corporate
Governance Index where I will include a variable capturing the presence of women in the Board of Directors.
This topic has not been researched in the context of REITs and to my knowledge this is the first attempt to do so
Hypothesis II
 I will test the effect of institutional ownership in the financial performance of Real Estate Investment Trusts. The
institutional ownership level will not be taken at absolute level but I will concentrate to the top 10 institutional
holders

7. Univariate Regression
The Effects of CG on Financial Performance
 Corporate Governance Index
 Staggered Board
 CEO Entrenchment
 Women on Board of Directors
 3 Groups
 Results as measured by ROAA
 CG – Index = 3 3.17%
 CG – Index = 2 1.98%
 CG – Index = 1 1.47%
Women on BoD
CG - Index ROAE
ROAA

8. Univariate Regression
Institutional Ownership and Financial Performance
 3 Groups
 IO > 50%
 IO > 30% & < 50%
 IO < 30%
 The reasons to do so:
 It has never been done before
 To capture the difference between effective control and pure
control
 Results as measured by ROAA
 Group 1 n/a
 Group 2 2.51%
 Group 3 1.16%
More Data
 For the year 2012 leads to this results
 ROAA
 Group 1 1.78%
 Group 2 3.32%
 Group 3 2.91%
 ROAE
 Group 1 5.34%
 Group 2 8.30%
 Group 3 6.65%
Institutional Ownership ROAE

9. Multivariate Regression
The Effects of CG on Financial Performance
 Board Size
 Small boards are more effective in monitoring the CEO,
appointing and/or removing the CEO and deliver better financial
performance as measured by ROA and Tobin’s Q
 CEO Tenure
 Longer staying CEO influence BoD decision making
 Undermine its independence
 Insider Ownership
 Alignment of interest and elimination of principal-agent problems
 Health rates of 5% lead to positive financial performance
 Corporate Governance Index
 Better governed REITs will result in higher ROA
More Data
Correlation ROAA CEO_TENURE CEO_CGINDEX INSTITUTOWN BRDSIZE
ROAA 1.00
CEO_TENURE 0.23 1.00
CEO_CGINDEX -0.02 -0.38 1.00
INSTITUT_OWN 0.20 0.14 0.00 1.00
BRDSIZE -0.12 0.00 0.03 -0.04 1.00
 Control variables
 Market capitalization
 TD/TA
2007 2008 2009 2010 2011 2012
BRDSIZE (-0.34) (-0.72)* 0.39 (-0.93)* (-1.26)** (-1.56)***
0.52 0.42 0.62 0.56 0.61 0.46
CEO_TENURE 0.09 (0.19)* 0.03 0.13 0.10 0.02
0.11 0.11 0.17 0.15 0.14 0.15
CG-INDEX (0.18)* -0.26 (0.24)* (0.33)* (0.30)* (0.24)*
0.10 0.24 0.15 0.18 0.20 0.14
INSIDER_OWN 0.06 0.04 (0.25)*** 0.33 0.06 (0.2)*
0.08 0.08 0.10 0.12*** 0.12 0.11
Nr. of Obs 89 89 89 89 89 89
R-Squared 0.30 0.30 0.28 0.27 0.33 0.34

10. Pooled OLS Regression
CG – Index Excluded Results
Women on BoD
 Statistically significant
 Low standard errors
 Positive effect on
financial performance
Institutional Ownership
 Statistically significant
 High standard errors
for ROAE
 Positive impact on
financial performance
Corporate Governance Index
 Statistically significant
 Low standard errors
 Positive impact on
financial performance
CG – Index Included
ROAA t-statistic ROAE t-statistic
CG-INDEX (0.92)*** 3.75 (3.29)*** 3.44
0.24 0.95
CEO_TENURE 0.04 0.82 0.06 0.51
0.04 0.11
INSTITUT_OWN (2,86)** 1.93 (17.43)*** 2.45
1.48 7.10
INSIDER_OWN -1.03 -0.29 -0.74 -0.04
3.56 16.96
BRDSIZE 0.11 0.18 1.80 1.19
0.04 1.34
TENUREBRD (0.51)*** 5.36 (1.91)*** 4.48
0.09 0.42
NMOUTSIDER -0.51 -1.25 (-2.61)* -1.88
0.35 1.39
D_2007 0.55 -1.14 -1.88 -0.60
1.11 3.11
D_2008 1.21 -1.21 -1.74 -0.58
1.02 2.97
D_2009 -1.19 -1.23 -1.59 -0.57
0.97 2.81
D_2010 -1.31 -1.58 -2.55 -1.02
0.73 2.50
D_2011 -0.71 -0.97 -2.70 -1.14
0.63 2.38
Nr. ofObs 404 404
R-Squared 0.37 0.41

11. Wrapping up
Robustness Main Findings
 For every regression where ROAA
used as an independent variable,
ROAE was tested. No difference
in terms of positive/negative
effect
 Tobin’s Q was used an
independent variable. The results
very similar to the ones of the
ROAA
 Dividend Payout Ratio and Free
Funds from Operation were
included as control variables in
both the multivariate and OLS
Pooled Regression. Statistically
no significant change in results
 Corporate Governance has a positive impact on performance
 The strongest impact comes from the inclusion of women in the BoD
 The presence of a classified board is positively related with financial performance
 CEO duality has no significant impact on ROAA or ROAE
 On average the increase in term of the CG-Index with 1 point leads to an improvement of
Returns on Assets equal to 0.30% on a yearly basis
 The presence of institutional ownership has a positive impact on financial performance
 REITs where the top 10 institutional owners control between 30% and 50% of the
outstanding stock will result in return on assets increasing with nearly 2.50% but the
standard error stands around 1.50% for this variable
Suggestions
 Further research must be conducted to capture the effect of Women in the financial
performance of Real Estate Investment Trusts
 The data for the institutional ownership was limited to only 4 years. Having a larger time-frame
could present a more detailed effect of this variable on the financial performance of REITs

12. This research would have not been anchored successfully without the unconditional help and support of Prof. Dr.
Joseph McCahery. His advice and his support have been the funding stone of this paper. The data was made available
by Dr. Nils Kok. Throughout the building process and the finalizing phase his insights were of great value in terms of
helping tackle the research question from a new and untapped angle. The entire GRESB team was simply amazing in
creating the perfect working environment and backing me up in this lengthy process. My dear friends, Alban, Daniel,
Diedrik, Mert, Stasia and Orkhan, proved to be tremendously crucial as they helped to ensure that the robustness of
the research is unchallengeable and reviewed the paper from cover to back to assure its uniqueness. Thank you!