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The authors propose a model to show how the fee structure of listed Real Estate Investment Trusts (REITs) can increase instead of decrease Management Company opportunistic behaviors. Distinguishing between performance fees paid on the fund market value and management fees paid either on the Net Asset Value (NAV) or on the Gross Asset Value (GAV), they show that only the former aligns the Management Company and shareholder interests. In particular, they demonstrate that management fees lead Management Companies to make suboptimal financing and investment decisions in order to maximize their own wealth at the expense of shareholders. They test the predictions of the model empirically using a panel of Italian listed REITs.
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