REIT Capital Budgeting and Equity Marginal Q*

Equity marginal q is the change in market value of a company’s equity in conjunction with a oneunit unexpected change in its asset base. Hence, it is a profitability index that evaluates a firm’s capital budgeting decisions at the margin. In this paper, we estimate the equity marginal q for real estate-managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class. After controlling for equity issuance and leverage that can mechanically affect the equity marginal q ratio, we find that REITs with greater idiosyncratic volatility and higher stock turnover have a higher equity marginal q, confirming the information and liquidity benefits of public stock markets. In addition, the holdings of institutional investors and their investment horizons are respectively positively related to equity marginal q, suggesting that monitoring power is attributable mostly to institutions with a long-term perspective. Finally, firm size is found to be negatively related to equity marginal q.