Technical, Allocative and Scale Efficiencies of REITs:
An Empirical Inquiry


  • John C. Topuz,

  • Ali F. Darrat,

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  • Roger M. Shelor

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    • The authors are respectively, from the Department of Accounting and Finance, Southeastern Oklahoma State University; Department of Economics and Finance, Louisiana Tech University; and Department of Finance, Ohio University. They wish to thank, without implicating, the editor and an anonymous referee for several helpful comments and suggestions. The final draft of this paper was completed while Darrat was spending his sabbatical at the Department of Accounting and Finance, the American University of Sharjah.

Ali F. Darrat, Department of Economics and Finance, Louisiana Tech University, Ruston, LA 71272, USA.


Abstract:  This paper empirically explores various efficiency aspects of Real Estate Investment Trusts (REITs) in light of their remarkable growth in the 1990s. We find clear evidence of considerable technical inefficiency in REITs, though not much indication for allocative or scale inefficiency. The results also suggest that an increasing number of REITs has been operating under diseconomies of scale since the late 1990s primarily due to the recent wave of consolidation and merger activities. As creatures of the US tax code, REIT's have undergone several changes to their operating status, and our results suggest that the prevalent regulatory environment appears too onerous for the industry and may have contributed to the REITs’ poor efficiency performance. In particular, further cuts or total elimination of the dividend restriction on REITs could provide much needed relief and stability in the US real estate market.