Public REITs Governance and Regulatory Structure: Effects on NAV Discount. Evidence from the Italian Market.

Purpose - This paper investigates the influence of the Italian REITs’ governance and regulatory structure on the market prices discount to net asset values (NAV). Design/methodology/approach - The hypothesis is that the overall regulatory design and the rules for prudential vigilance (i.e. governance rights, closed-end form, leverage constraints, and mandatory listing) influence REITs’ share value, both as market price and as net asset value). In particular, the analysis focuses on the effects of the recent introduction of a shareholders’ meeting in the articles of association of newly established REITs that pursues a better alignment of interests between managers and shareholders. Findings - The original results show that the NAV discount decreases as long as time to maturity of the fund decreases. Conversely, the NAV discount is negatively affected by share turnover (as a proxy of the liquidity generated by the mandatory listing provision) and leverage. The regulatory provision of a shareholders’ meeting appears to have improved the investors’ governance capability having a positive impact on the NAV discount. The different sensitivity of market prices and NAVs to the regulatory variables investigated – due to the different valuation standards implied in the two share values – suggests the need to consider this dichotomy when defining or amending the regulatory set ruling REITs’ operations and market dynamic. Research limitations/implications – The analysis does not provide a complete explanation of the NAV discount level and dynamics, since the objective has been to test the influence of the main Italian REITs’ regulatory variables. Therefore, further research works will investigate the functional relation between NAV discount and other possible explicative variables. The availability of a wider set of data will also improve the research findings. Originality/value – This paper is the first in the Italian context to specifically consider the effect of the regulatory environment on the NAV discount. In particular, the effect of the regulatory provision of a shareholders’ meeting has never been investigated before.