What is the Relationship Between REIT Governance and Earnings Management?

Posted: 18 Sep 2013

See all articles by Paul Anglin

Paul Anglin

University of Guelph

Robert H. Edelstein

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics

Yanmin Gao

City University of Hong Kong - College of Business

Desmond Tsang

McGill University - Desautels Faculty of Management

Date Written: September 17, 2013

Abstract

The empirical corporate finance literature claims that better corporate governance constrains earnings management, while others argue that the unique legal and reporting structure of REITs may reduce the need for such internal corporate governance. Using a sample of publicly traded REITs for the 2004-2008 time period, we examine the relationships amongst corporate governance, accruals earnings management, manipulation of Funds from Operations (FFO), and real earnings management. We find that corporate governance quality is unrelated to accruals earnings management and manipulation of FFO. At first glance, the findings suggest that managers need less internal oversight because of the more transparent reporting structure of REITs. However, we document that REITs engage in significant real activities manipulation for earnings management purposes. Our empirical findings further show that corporate governance characteristics, in particular board size, independence, number of board meetings and audit committee financial expertise, are essential for constraining such activities. Finally, by focusing on a subset of REITs that act in ways which previous research has identified as more susceptible to earnings management activities, we demonstrate that good corporate governance effectively reduces accruals earnings management and manipulation of FFO for these REITs. Overall, our findings indicate that, despite the unique legal and reporting structure, REITs engage in certain forms of earnings management, and that the ability for REITs to manipulate earnings is reduced when corporate governance is more effective.

Keywords: Real Estate Investment Trusts (REITs), corporate governance, earnings management, FFO

JEL Classification: G32, G34, M40

Suggested Citation

Anglin, Paul and Edelstein, Robert H. and Gao, Yanmin and Tsang, Desmond, What is the Relationship Between REIT Governance and Earnings Management? (September 17, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 3, 2013, Available at SSRN: https://ssrn.com/abstract=2327186

Paul Anglin (Contact Author)

University of Guelph ( email )

Guelph, Ontario
Canada

Robert H. Edelstein

University of California, Berkeley - Fisher Center for Real Estate and Urban Economics ( email )

Haas School of Business
Berkeley, CA 94720-1900
United States
510-643-6105 (Phone)
510-643-7357 (Fax)

Yanmin Gao

City University of Hong Kong - College of Business ( email )

Hong Kong
Hong Kong

Desmond Tsang

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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