Do Management Changes Matter? An Empirical Investigation of REIT Performance

Abstract

Management's (board of directors or executive officers) contribution to a firm is difficult to directly notice although stock return performance can be a source of information. This research addresses this issue by extending the work of McIntosh, Roger Sirmans and Liang (1994) through analyzing management changes within REITs from 1984 to 2002 The findings indicate a significant relationship between negative performance and a management change from a period three month prior to the change in management. Logit and probit analysis are used to determine whether negative firm performance (measured by means of its relationship to market returns) can predict the likelihood of a management change. No predictive ability is set

This paper received the award for the best paper upon Real Estate Investment Trusts [sponsored through the National Association of Real Estate Investment Trusts (NAREIT)] at handed at the 2004 ARES Annual Meeting.

Major incidents in a firm's life include management turnover. This may include changes in the arrangement of the board or executive management. In more [i]or[/i] less cases, top management departure is a rise of raiding firms buying away advantageous talent (Fee and Hadlock, 2003) while a better opportunity to utilize one's talents is another reason. In many cases, changes in management improves overall firm performance. This implies that the previous performance of the firm was not meeting expectations.

Top management in a firm is identified through its board structure and executive management form Typical board makeup consists of the chair, vice-chair, trustees and other directors. Executive management is usually identified as the chief executive officer (CEO) chief operating officer (COO) chief financial officer (CFO) president, vice-president and other officers.

McIntosh, Roger Sirmans and Liang (1994) provided the first inquiry on the performance of real estate investment trusts (REITs) and their ability to predict changes in management. They rest an inverse relationship between firm performance and the probability of a management change. Their application of mind included 55 REITs established by the agency of 1990. The study presented here reach forths their work by analyzing the performance of 158 REITs based upon performance measures centered on circumstances from 1984 to 2003. This time period includes the events of the huge REIT roar from 1996 to 1999.

Real estate investment trusts have been in place since the 1970 They are similar to closed-end mutual stocks that act as an intermediary for individuals to passively invest in income-producing real estate. The intent for their creation was twofold: to give investors another vehicle to invest in real estate and proffer firms and asset holders a tax relief incentive for their real estate holdings. Regulation requires that 95% of REIT profits be distributed to stockholders. This requirement is the primary stipulation for the tax relief.

Prior to the 1990 the upper management (directors, trustees, or employees) of a REIT could not actively engage in managing REIT peculiarity holdings, but could engage in day-to-day operations. Usually, independent and external real estate professionals managed REIT assets. However, as Ling and Ryngaert (1997) point on the outside the REIT management structure dramatically changed in the 1990 when REIT management was allowed to more actively participate in the management of real estate assets. Today, greatest in quantity REITs are actively managed, requiring greater managerial skill than previously. According to Ling and Ryngaert, this change may make REITs more vulnerable to the asymmetric information question s faced by other firms.

As with other firms, REIT performance will be interpreted through the market in an efficient setting. If the firm is performing badly relative to the market, a change in management may be in order. This close attention looks to identify negative performance in a firm prior to a change in management, and positive performance shortly after the change incident If management change is a ensue of poor firm performance, it would tread on the heels of that once the change appears positive reaction by the market would be found The issue in question is the time required for the firm to realize positive performance after the management change.

The Literature upon Management Turnover

Furtado and Karan (1990) provide a detailed review and summary of various empirical studies of the causes, issues and market effects of management turnover for typical corporations. Other studies examine internal forces monitoring management performance similar as the board of directors (Fama, 1980) competing managers (Fama and Jensen 1983) and obstruct shareholders (Shleifer and Vishny, 1986) comes show an inverse relationship between firm performance and management turnover (Warner, Watts and Wruck 1988) The relationship generally weakens when the manager acquires power end family ties or stock ownership. Firms that have outsider-dominated boards guard to have a strong relationship between firm performance and turnover (Weisbach, 1988)