Managerial opportunism and the capital structure decisions of property companies
| Published date | 01 June 2000 |
| Date | 01 June 2000 |
| Pages | 316-331 |
| DOI | https://doi.org/10.1108/14635780010338317 |
| Author | Joseph T.L. Ooi |
| Subject Matter | Property management & built environment |
JPIF
18,3
316
Journal of Property Investment &
Finance, Vol. 18 No. 3, 2000,
pp. 316-331. #MCB University
Press, 1463-578X
Received June 1999
Revised February 2000
ACADEMIC PAPERS
Managerial opportunism and
the capital structure decisions
of property companies
Joseph T.L. Ooi
School of Building and Real Estate,
National University of Singapore, Singapore
Keywords Shareholders, Wealth, Decision making
Abstract The focus of this paper is on the problem of managerial opportunism in the corporate
governance of UK quoted property companies. Agency conflicts exist between firm managers and
owners because of the separation of ownership from management. Consequently, managers
pursue activities that enhance their interests rather than that of the shareholders'. The empirical
investigation of this paper is divided into two sections. The first part examines the ownership
structure of 83 UK quoted property companies between 1989 and 1995, revealing that close to a
quarter of the common shares issued by the companies are held by the managers. The gap
between ownership and management appears to increase with firm size, risk and growth rate but
decrease with corporate performance. In the second section, logit modeling is employed to
examine 110 security issues of the companies during the study period. The evidence shows that
ownership structure has an influence on the debt-equity choice of property companies. Consistent
with the findings of previous studies, the study also reveals that the capital structure choice is
dictated to a large extent by company size, issue size, and condition of the security market. The
empirical analysis also suggests that property companies make their financing decisions as though
they have a target capital structure in mind.
Introduction
The traditional models of capital structure is based on the premise that
corporate managers always act in the best interest of the owners and that the
primary aim of managers is to increase shareholders' wealth. Some researchers
have, however, argued that managers do not always do so. They, instead,
pursue actions that serve to perpetuate their own agenda, which may be in
conflict with the owners' interests. The conflict of interests, better known as
moral hazard problems in the finance literature, exist as a result of the
separation of management from ownership. In their seminal paper, Jensen and
Meckling (1976) highlighted the tendency of managers to consume expensive
perquisites when they own only a fraction of the firm's ownership. Managers
are also prone to spending available funds in ``empire-building'' projects that
enhance their own entrenchment and public reputation even if paying out cash
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The author would like to acknowledge the constructive and helpful comments of participants at
the 6th European Real Estate Society Conference (held in Athens in June 1999), members of the
Real Estate Finance, Investment and Valuation (REFIV) Group at the National University of
Singapore, and the two anonymous referees.
Academic
papers:
Managerial
opportunism
317
is better for the shareholders (Jensen, 1986; Shleifer and Vishny, 1986; Stulz,
1990). Furthermore, managers are averse to relinquishing control of the firm.
Hence, liquidation and takeovers are often opposed even though they may be in
the best interest of the shareholders (Harris and Raviv, 1988). A relevant
question to ask then is how can the outside owners protect their interest and
ensure that the managers do not siphon funds or make bad investments to the
owners' detriment.
The issue of managerial opportunism is especially relevant in the corporate
governance of property companies where managers have numerous
opportunities to exercise their discretion in property matters. Due to the longer
horizon associated with real estate investment, property managers are usually
subjected to less pressure to produce immediate results as compared to their
counterparts in other sectors. Furthermore, property managers are more
inclined towards empire building and enhancing their reputation given the
prominent media coverage on major property deals. Based on past experiences
in the USA, Sirmans (1997) suggests that outside investors would have little
confidence in managers. In particular, ``the real estate markets have been
plagued by `entrepreneurs' who abscond with investors' money, from the
1920s' Florida land scandals to the real estate syndications of the late 1970s and
early 1980s''.
This exploratory paper seeks to highlight the potential problem of
managerial opportunism in the corporate governance of UK property
companies. In the first part of the empirical research, we examine the
ownership structure of 83 property companies listed on the London Stock
Exchange between 1989 and 1995. On average, the stockholding of the
directors and officers represents about one-quarter of the equity while
outside blockholders who are not associated with the management team held
22.4 per cent. The data also shows that the divorce between ownership and
management increases with firm size, risk and growth rate and inversely
with corporate performance. Smaller property companies tend to be held
closely by their management team. Larger property companies, on the other
hand, have more institutional investors among their equity owners. In the
second part of the empirical investigation, we examine 110 security issues
made by UK property companies during the study period. Logit regressions
are carried out to test whether the debt-equity choice is influenced by the
ownership structure of the company. The empirical evidence appears to
show that ownership structure has an influence on the security choices of
property companies. The evidence also reveals that the debt-equity choice is
influenced, to a large extent, by company size and the condition of the
security market.
The rest of this paper is organized as follows: In the next section, we review
recent developments in the theory of capital structure with specific focus on the
managerial paradigm. We then examine the ownership structure of the
property companies in our study sample. The determinants of the debt-equity
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