The Performance of Founder-Controlled Publicly Traded Real Estate Companies in Bull and Bear Markets

By Shulman, Joel M.; Cox, Raymond A. K. | Indian Journal of Economics and Business, March 2009 | Go to article overview

The Performance of Founder-Controlled Publicly Traded Real Estate Companies in Bull and Bear Markets


Shulman, Joel M., Cox, Raymond A. K., Indian Journal of Economics and Business


Abstract

This paper explores the stock market performance of U. S. founder controlled real estate investment trusts (REITs) from 1997 to 2008. When compared to non-founder REITs it is shown that founder controlled equity, mortgage and combined REITs returns are not statistically significantly different from each other. This result may be explained by the opportunity of founders to extract other forms of income from the organization that they control.

I. INTRODUCTION

The phenomenon of superior performance of founder firms may be prevalent in some sectors as opposed to others. This paper explores founder managed firms in the real estate investment trusts (REITs) industry with respect to their return and risk performance compared to non-founder managed REITs as well as the stock market.

Jirasakuldech and Knight (2005) examined the efficient markets hypothesis and random walk behaviour using monthly returns from January 1972 to May 2004 from the National Association of Real Estate Investment Trusts (NAREIT) for the three indexes (equity, mortgage and hybrid) and overall real estate investment trust (REIT) index with the Russell 2000 Index as the market benchmark utilizing the serial correlations, variance ratio and non-parametric runs test. It was found that mortgage REITs, equity REITs, and hybrid REITs did not follow a random walk but instead possessed a positive autocorrelation, possibly explained by size and thin trading or transaction costs. However, they were weak form efficient whereas equity REITs did become more efficient over time.

Kuhle and Alvayay (2000) studied a small randomly selected sample of 108 equity REITs from January 1989 to October 1998 (monthly prices) and 102 equity REITs from November 2, 1997 through February 1999 (daily prices) from Compustat, Value Line and Standard and Poor's stock report, gathering evidence supporting, at times, an inefficient market.

Liu and Mei (1992) created an all equity REIT portfolio from the Center for Research on Security Prices (CRSP) for the January 1971 to December 1989 corrected for the survivorship bias. It is shown that the expected excess returns for equity REITs is more predictable than small capitalization (cap) stocks, value weighted stocks and bonds. Moreover, the risk premium is time-varying suggesting opportunity for market timing.

Swanson, Theis and Casey (2002) observed daily returns for 307 REITs on CRSP, Compustat PC Plus for financial statement information and the Federal Reserve Bank for interest rates for the 1989 to 1998 period. While interest rates and the long-to-short maturity spread do affect REIT returns it is shown that the credit rate spread has grown in impact over time. This is attributed to declining REIT credit worthiness across REIT type (equity, mortgage or hybrid).

Cheng (2005) looks at asymmetric risk measures for real estate assets, i.e. co-skewness, downside beta, systematic upside beta, skewness, conditional co-skewness and conditional skewness using National Council of Real Estate Investment Fiduciaries (NCREIF) property quarterly sub-indices from 1994 to 2002. It appears traditional beta does not explain real estate returns very well but rather downside beta and conditional skewness as opposed to the other asymmetric risk measures.

Colwell and Park (1990) show the size-related seasonality effect in real estate related investment. Using daily returns from CRSP on 28 equity REITs and 33 mortgage REITs listed on the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) from 1964 to 1986 they show small REITs have a high abnormal return in January.

Liu, Hartsell, Greig and Grisson (1990) studied commercial non-farm real estate returns and equity REITs from June 1978 to September 1986 and found the commercial real estate market is segmented from the stock market including equity REITs. This segmentation phenomenon is thought to be caused by indirect barriers such as the cost, amount and quality of information. …

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