Regulatory and Non-Regulatory Influential Factors for Earnings Management by Real Estate Investment Trusts

Abstract

This research investigates how non-regulatory, and regulatory factors influence the Earnings Management (EM) by Real Estate Investment Trusts (REITs). The regulatory factors pertain to the REITs’ regulatory regimes. The non-regulatory factors include the composition of property portfolios, the choice of the security structure, the 2007 global financial crises (GFC), EM persistence and the trade-off between different EM measurements. This study is based on quantitative methodology, and it uses an unbalanced panel database with information of REITs from major REIT markets from 2000 to 2013. This research extends and modifies models from existing literature to estimate the EM measurements of REITs. Static and dynamic panel data models are used in empirical tests. Treatment effect estimators are employed to analyse the impact of security structure choice and REITs’ conversion on EM. This research provides the following findings: (1) The variances of the proportions of different types of property in the property portfolio held by New Zealand Listed property portfolios have a significant impact on the magnitudes of using various EM approaches. (2) The 2007 GFC has changed the EM behaviour of the U.S equity REITs. (3) Compared to unstapled Australian REITs, stapled Australian REITs engage in EM activities in a greater magnitude. (4) The measurements of EM activities in the current accounting period react to their own value in the previous accounting period and the measurements of other EM activities in the previous accounting period in different manners. (5) Listed real estate corporations change their EM behaviour to prepare for their REIT conversion. Listed real estate corporations are different from REITs in regard to their EM behaviour. (6) The magnitudes of accrual EM activities are found to be positively correlated with the abnormal volatilities of the leverage ratio and the dividend pay-out ratio. (7) The incentive for REITs to comply with the requirements for leverage ratio and dividend pay-out ratio significantly impacts the magnitudes of EM measurement. These results contribute to the understanding of information asymmetry, efficient market hypothesis and corporate governance in the context of REITs. The findings enhance investors’ and policymakers’ knowledge of the disclosure of financial information for REITs and may assist in improving transparency in REIT markets.