The Cost Efficiency of Real Estate Investment Trusts: An Analysis with a Bayesian Stochastic Frontier Model

The Cost Efficiency of Real Estate Investment Trusts: An Analysis with a Bayesian Stochastic... Using a stochastic frontier methodology that incorporates Bayesian statistics, this paper analyzes the cost efficiency of real estate investment trusts (REITs) by observing the deviations of the measured costs of individual REITs from a defined efficient cost frontier. Using 1995–1997 data, we extend the previous research in this area and measure REIT efficiency more precisely by isolating random measurement error from the overall deviations from the efficient cost frontier. We calculate the magnitude of each REIT's managerial inefficiency, the industry inefficiency, and returns to scale. In addition, we assess specific characteristics of REITs for their contribution to inefficiency by calculating the odds ratio that a REIT with a specific characteristic is more efficient than a REIT with an alternative characteristic. The results show that, for the years studied, REITs are relatively cost efficient with most REITs facing increasing returns to scale. Additionally, the REIT's use of debt and the REIT's management style significantly affect the cost performance of REITs during the aforementioned time period. Finally, diversification across property types, as measured, does not seem to influence REIT cost efficiency. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

The Cost Efficiency of Real Estate Investment Trusts: An Analysis with a Bayesian Stochastic Frontier Model

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1021522231824
Publisher site
See Article on Publisher Site

Abstract

Using a stochastic frontier methodology that incorporates Bayesian statistics, this paper analyzes the cost efficiency of real estate investment trusts (REITs) by observing the deviations of the measured costs of individual REITs from a defined efficient cost frontier. Using 1995–1997 data, we extend the previous research in this area and measure REIT efficiency more precisely by isolating random measurement error from the overall deviations from the efficient cost frontier. We calculate the magnitude of each REIT's managerial inefficiency, the industry inefficiency, and returns to scale. In addition, we assess specific characteristics of REITs for their contribution to inefficiency by calculating the odds ratio that a REIT with a specific characteristic is more efficient than a REIT with an alternative characteristic. The results show that, for the years studied, REITs are relatively cost efficient with most REITs facing increasing returns to scale. Additionally, the REIT's use of debt and the REIT's management style significantly affect the cost performance of REITs during the aforementioned time period. Finally, diversification across property types, as measured, does not seem to influence REIT cost efficiency.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 4, 2004

References

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