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1June, 25 - 2009 ERES 2009 1
Italian REITs Governance and Regulatory Structure:
Effects on Nav Discount
Massimo Biasin, Emanuela Giacomini, Anna Grazia Quaranta
University of Macerata
emanuela.giacomini@unimc.it
ERES 2009Stockholm, 24th -27th June 2009
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Syllabus
Research question
The Italian REITs market and regulatory environment
Literature Review and Theoretical Framework
Data and methodology
Results and conclusions
2
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Research Objective
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The investigation of the effects of the Italian REITs governance and regulatory
structure on NAV discount
In particular we focus on:
1) Governance structure (shareholders’ meeting);
2) Leverage limitation;
3) Closed-end form (finite life);
4) Mandatory listing;
5) Size
Effects (we argue) depend on the valuation perspective:
Net Asset Value (NAV)
Market (financial) Value (MV)
Main references of previous works e.g.: Capozza, Lee (1995); Clayton, MacKinnon (2001), Barkham, Ward (1999), Bond, Shilling (2004), et al.;
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The Italian REITs NAV discount
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The Italian REITs NAV Discount – December 2007
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The European Public REITs Market
5
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The Italian REITs Market: Relevant Regualtory and Market Features
6
Main regulatory and market features relevant for the analysis:
Closed-end structure (externally managed) refers to the finite life of the REIT
Agency cost and conflicts of interest – Governance implications
New equity offerings admittedù
Mandatory listing for “retail” REITs
To increase shares liquidity
To favor shareholders’ way-out
Leverage limitations (D/A ≤ 60% or, alternatively, D/EBOOK ≤ 1.5)
Tax-free (pass-through) entities (corporate-level).
No mandatory pay-out. Pay-out ratios defined at articles of association level.
REITs share mandatory valuation standard: net asset value
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Literature Review and Theoretical framework
7
Governance mechanisms
Italian REITs suffer from severe agency problems and potential conflict of interest
situations which can influence the NAV discount by trading off the benefit of
professional management
External-advised REITs vs internal-advised REITs [Howe, Shilling (1990); Cannon, Vogt (1995); Ambrose,
Linneman (2001); Capozza, Seguin (2000)]
Mandatory provision of a shareholders’ meeting entitled to fire the management
company (2003)
This rule aims to limit managers’ opportunistic behaviour when market discipline comes into play by
inducing takeovers of poorly managed REITs
This incentive does not affect traditional REITs not having shareholders’ control mechanisms
Hypothesis: the foreseeing of a general shareholder meeting can reduce the NAV
discount through a (potential) higher protection for investors against adverse
management activity
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Literature Review and Theoretical framework
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(1) Leverage [LEV]
D/A ratio Uncertain effect on NAV Discount
(2) Market Liquidity Shares’ turnover (proxy) [TURN]
Positive effect on NAV Discount (via market price) (3) Correlation between market excess return and stock market index (Mibtel) [BETA(P)]
Negative effect on NAV Discount (via market price) (4) Correlation between NAV excess return and stock market index (Mibtel) [BETA(NAV)]
Positive effect on NAV Discount (via NAV figures)
(5) Time to Maturity [TIME] negative effect on NAV Discount (via inverse relation with market prices path).
(6) Size [SIZE] REIT’s portfolio investment (total asset value/total REITs market)
Uncertain effect on NAV discount
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Data and empirical methodology
Market price NAV discount was calculated on the following basis:
where:
NAVit = net asset value of each share of the ith REIT at time t;
Pit = market price of the ith REIT at time t.
Data: daily market prices (Italian Stock Exchange)
half-year NAV figures (Assogestioni)
proxy for daily NAV through data linear interpolation
Italian public REITs (21) - Period from 30th of June 2006 to 31st of December 2007
Explicative variables are normalized
9
it
ititit NAV
PNAVNAVDISC
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(1) Preliminary separated time series and cross-section analysis of the of the two NAV Discount determinants:
Market Price [P] Relevance of TURN, TIME, BETA(P), LEV and SIZE (according to our theoretical expectation)
Data and empirical methodology
NAV Relevance of SIZE, LEV and BETA(NAV) (according to our theoretical expectation)
),)(,)(,,,,,(f itititititititit ASSEMBNAVBETAPBETASIZETIMETURNLEVCONSTNAVDISC
(2) We expressed the NAV Discount [NAVDISC] as follows:
Dummy variable:
0 if the REIT’s articles of association foreseen the general shareholder meeting
1 otherwise
We used a panel data of 21 Italian REITs (378 periods - 7.938 observations)
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Results and conclusions
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The panel fixed effects results pointed out the relevance of all the explicative variables assumed in explaining NAVDISC
NAVDISC increases as the time to maturity, the REIT market price correlation
with the stock market index increases and is positively related to SIZE.
NAVDISC decreases when the REIT share liquidity, the leverage and the NAV correlation with the stock market index increase.
The shareholders’ meeting mechanism also shows a negative correlation with the NAVDISC.
Relevant regulatory policy implications Shareholders’ meeting mandatory provision improved investors’ governance capability
Results and conclusions
12
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