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Do REITs use cash reserves efficiently? Evidence from corporate acquisitions

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  • Ghosh, Chinmoy
  • Petrova, Milena
  • Xiao, Yihong

Abstract

We examine the combined impact of corporate governance and excess cash holdings on the propensity of firms to become bidders and engage in value destroying acquisitions. We focus on the REIT market, due to its unique characteristics caused by regulation and the nature of the industry. The lack of active real estate takeover market should lead to entrenchment and exacerbate agency costs. However, given the mandatory high cash payout for REITs, the absence of takeover market should not cause concerns to shareholders. Our analyses reveal that unlike conventional firms, cash-rich REITs are not more likely to become acquirers and acquisitions by cash-rich REITs are not value decreasing. However, similarly to industrial firms, REITs with higher excess cash and lower insider ownership are more likely to become bidders. We interpret our results to be consistent with the hypothesis that agency problems are less severe in real estate and investors are not averse to use of excess cash by REIT managers on intra-industry acquisitions.

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  • Ghosh, Chinmoy & Petrova, Milena & Xiao, Yihong, 2012. "Do REITs use cash reserves efficiently? Evidence from corporate acquisitions," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1953-1970.
    • Handle: RePEc:eee:jimfin:v:31:y:2012:i:7:p:1953-1970
    DOI: 10.1016/j.jimonfin.2012.05.019
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    Cited by:

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    2. Steffen Westermann & Scott J. Niblock & Michael A. Kortt, 2018. "A Review of Corporate Social Responsibility and Real Estate Investment Trust Studies: An Australian Perspective," Economic Papers, The Economic Society of Australia, vol. 37(1), pages 92-110, March.
    3. Steffen Westermann & Scott Niblock & Michael Kortt, 2018. "Corporate social responsibility and the performance of Australian REITs: a rolling regression approach," Journal of Asset Management, Palgrave Macmillan, vol. 19(4), pages 222-234, July.
    4. Rajesh Kumar & Sarbjit Singh Oberoi, 2019. "Cash Richness and Propensity to Acquire An Empirical Examination Based on Largest Deals," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 74-79.
    5. Julia Freybote & Lihong Qian, 2015. "The impact of asset location on REIT merger decisions," Journal of Property Research, Taylor & Francis Journals, vol. 32(2), pages 103-122, June.
    6. Chinmoy Ghosh & Le Sun, 2014. "Agency Cost, Dividend Policy and Growth: The Special Case of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 660-708, May.
    7. Chris Ratcliffe & Bill Dimovski & Monica Keneley & Tom Smith, 2017. "Long-Term post-merger announcement performance. A case study of Australian listed real estate," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(3), pages 855-877, September.

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