The Effect of Legal Environment and Regulatory Structure on Performance: Cross-Country Evidence from REITs

We study the relationship between international REIT regulatory structures and real estate returns and find that the legal requirements that REITs face in each country represent an important determinant of market performance and risk-adjusted returns. Specifically, minimum capital, minimum payout requirement, and taxation of undistributed ordinary income are consistently positively related to past and future risk-adjusted performance. In addition, strength of shareholder rights protection, leverage and development restrictions and the widely held requirement are also related to significantly higher future returns. In contrast, the strength of credit rights protection, restrictions on concentration of ownership, and the requirements for distribution of capital gains are related to a reduced risk-adjusted performance. These effects are generally stronger in explaining future returns and for larger firms. We also create a REIT regulation index and show that it is consistently positively related to returns and is a more significant determinant of returns than shareholder and creditor rights protection indices. Our results have important implications for REIT regulation across the world.