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Italian REITs Governance and Regulatory Structure: Effects on Nav Discount

ERES 2009. Stockholm, 24 th -27 th June 2009. Italian REITs Governance and Regulatory Structure: Effects on Nav Discount. Massimo Biasin, Emanuela Giacomini, Anna Grazia Quaranta University of Macerata emanuela.giacomini@unimc.it. 1. Syllabus. Research question

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Italian REITs Governance and Regulatory Structure: Effects on Nav Discount

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  1. ERES 2009 Stockholm, 24th -27th June 2009 Italian REITs Governance and Regulatory Structure: Effects on Nav Discount Massimo Biasin, Emanuela Giacomini, Anna Grazia Quaranta University of Macerata emanuela.giacomini@unimc.it 1

  2. Syllabus • Research question • The Italian REITs market and regulatory environment • Literature Review and Theoretical Framework • Data and methodology • Results and conclusions 2

  3. Research Objective • The investigation of the effects of the Italian REITs governance and regulatory structure on NAV discount • In particular we focus on: • Governance structure (shareholders’ meeting); • Leverage limitation; • Closed-end form (finite life); • Mandatory listing; • 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.; 3

  4. The Italian REITs NAV discount The Italian REITs NAV Discount – December 2007 4

  5. The European Public REITs Market 5

  6. The Italian REITs Market: Relevant Regualtory and Market Features • 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 6

  7. Literature Review and Theoretical framework • 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 7

  8. Literature Review and Theoretical framework (1) Leverage [LEV] • D/A ratio (6) Size [SIZE] • REIT’s portfolio investment (total asset value/total REITs market) • Uncertain effect on NAV discount • 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). 8

  9. 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

  10. Data and empirical methodology (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) • NAV • Relevance of SIZE, LEV and BETA(NAV) (according to our theoretical expectation) (2) We expressed the NAV Discount [NAVDISC] as follows: • We used a panel data of 21 Italian REITs (378 periods - 7.938 observations) Dummy variable: • 0 if the REIT’s articles of association foreseen the general shareholder meeting • 1 otherwise 10

  11. Results and conclusions 11

  12. Results and conclusions • 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 12

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