Executive Summary. This article investigates whether the greater reliance of real estate investment trusts (REITs) relative to non-REIT corporations on external equity financing suggests greater capital market discipline of REIT management, or greater access to capital, overpaying for assets, overbuilding and overinvestment. Our analysis is based on a sample of sixteen hotel REITs and fifty-one non-REIT hotel corporations from 1993 to 1999. We examine differences in performance and whether free cash flow can explain the differences. The findings suggest that hotel REITs retain a significantly smaller amount of free cash flow than non-REIT hotel companies. Market valuation reflected in the market-tobook ratio is clearly negatively related to free cash flow measured at both before and after dividend levels. In addition, relatively small hotel REITs enjoy significantly higher excess market values than their non-REIT counterparts at similar sizes, suggesting greater growth opportunities for REITs.
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Mooradian et al. (2001) studied this question.
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