WHAT DRIVES CEOS TO TAKE ON MORE RISK? SOME EVIDENCE FROM THE LABORATORY OF REITS

This paper studies the impact of CEO discretion within the incentive structure of U.S. REITs. In contrast to the existing governance literature we focus on a specific sector with a specific legal setting (e.g., restrictive payout ratios), and organizational structure (e.g., little threat of a hostile takeover) to avoid issues of heterogeneity across industries. Restricting the focus to REITs allows us to simulate CEO behavior over the life cycle of the company and to generate and test empirically some interesting hypotheses how different CEO characteristics may affect the company's growth, its debt growth, and its performance. Testing is done on a panel of 101 U.S. equity REITs over the time period from 2003 to 2007. The empirics explicitly accounts for threshold effects in most continuous variables. The key empirical result is that a company's debt growth, and hence its exposure to risk, is inversely related to CEO stock ownership, but positively to a combination of the CEO also serving as chairman of the board of directors and large bonus payments.