Does Real Estate Ownership Matter in Corporate Governance?

Abstract

Does real estate ownership interact with corporate governance mechanisms in influencing firm performance? Sirmans (1999) hypothesizes that firms with substantial exposure to real estate risks require a different set of governance mechanisms to ensure proper alignment of interest between managers and shareholders. Our empirical tests, using a sample of 228 stocks listed on the Singapore Stock Exchange, show significant variations in governance mechanisms adopted by firms with intensive real estate holdings and other firms, after allowing for interdependence of alternative mechanisms. The results also show that insider ownership is significant and positively related to the Tobin's Q of sample firms. However, when we control for real estate ownership of the sample firms, the effect disappears. We further separate the sample firms into homogeneous clusters based on their corporate governance mechanisms, and test the relationship between governance and firm performance. We find significant positive interactive effects of real estate ownership and clustering of firms and their stock market abnormal returns. The stock market responds favourably to real estate holdings of firms that are not subject to shareholder voting problems. The empirical results do not reject the Sirmans hypothesis.

Keywords:

• Corporate governance
• real estate ownership
• firm performance

Acknowledgements

We thank Yin Lu for research assistance and participants at the AsRES–AREUEA International Real Estate Conference, Vancouver, 31 June–3 July 2006. We also acknowledge helpful comments from three reviewers. Errors, if any, remain the sole responsibility of the authors.

Notes

1. The Singapore Stock Exchange (SGX) revised its SGX‐ST Listing Rule 710(2) in 2001 to require firms listed on the exchange to disclose corporate governance practices in annual reports.