REIT Organizational Structure, Institutional Ownership, and Stock Performance

Research has shown that externally-advised equity real estate investment trusts (REITs) underperformed internally-advised REITs prior to 1993. We contend that an increase in monitoring by institutional investors beginning in 1993 would drive externally-advised REITs to mitigate problems associated with the external advisor relationship and improve performance. We confirm that externally-advised REITs performed poorly before 1993 and show that this under-performance does not persist in 1993 and later years. This performance improvement coincides with increases in institutional ownership of REIT stocks. We present evidence that supports the notion that monitoring by institutional investors helped equalize the performance of externally- and internally-advised REITs after 1993.