Is the MD&A of US REITs informative? A textual sentiment study

Abstract

PurposeThis study examines whether language disclosed in the Management Discussion and Analysis (MD&A) of US Real Estate Investment Trusts (REITs) provides signals regarding future firm performance and thus generates a market response.Design/methodology/approachThis research conducts textual analysis on a sample of approximately 6,500 MD&As of US REITs filed by the SEC between 2003 and 2018. Specifically, the Loughran and Mcdonald (2011) financial dictionary, and a custom dictionary for the real estate industry created by Ruscheinsky et al. (2018), are employed to determine the inherent sentiment, that is, the level of pessimistic or optimistic language for each filing. Thereafter, a panel fixed-effects regression enables investigating the relationship between sentiment and future firm performance, as well as the markets’ reaction.FindingsThe empirical results suggest that higher levels of pessimistic (optimistic) language in the MD&A predict lower (higher) future firm performance. Hereby, the use of a domain-specific real estate dictionary, namely that developed by Ruscheinsky et al. (2018) leads to superior results. Corresponding to the notion that the human psyche is affected more strongly by negative than positive news (Rozin and Royzman, 2001), the market responds solely to pessimistic language in the MD&A.Practical implicationsThe results suggest that the market can benefit from textual analysis, as investigating the language in the MD&A reduces information asymmetries between US REIT managers and investors.Originality/valueThis is the first study to analyze exclusively US REITs, whether language in the MD&A is predictive of future firm performance and whether the market responds to textual sentiment.

Evolution of REITs in the Nigerian real estate market

“…For example, in the USA, it was found that hotel REIT outperformed other investment assets in the market (Jackson, 2008). In the same country, it was found that management discussion and analysis (MD&A) impacts on US REIT performance (Koelbl, 2020). Similarly, US REIT responded negatively to economic depressions (Çepni et al , 2020).…”

Cyclicity of real estate-related trends: topic modelling and sentiment analysis on German real estate news

“…Likewise, Ruscheinsky et al (2018b) found a leading relationship between media sentiment and future REIT market movements. Moreover, Koelbl (2020) detected that higher levels of pessimistic (optimistic) language in the Management Discussion and Analysis of US REITs predict lower (higher) future firm performance. The first application of text-based sentiment analysis that focusses on the German real estate market was conducted by Ruscheinsky et al (2018a) through the development of a domain-specific dictionary.…”

Performance evaluation and volatility of Turkey REITs during COVID-19 pandemic

“…For example, Khairulanuwar and Chuweni (2020) reported a significant reduction in market capitalization of Healthcare REITs in Malaysia from RM1.58bn to RM0.96bn during the 2008 global Turkey REITs during COVID-19 pandemic financial crisis. In addition, a recent study conducted by Koelbl (2020) established a direct relationship between the transparency of REITs and their performance. This implies that a reduction in asymmetric information may enhance the performance of REITs.…”

“…Practical implications -The result suggests that since Turkish REITs are not mandatory to payout 90% of taxable earnings as dividends, high performance and an appropriate risk management approach are expected. The need for timely revealing performance of T-REITs and associated uncertainty may trigger better performance as discussed in the relationship between disclosure and performance which is recently emphasized in a recent study by Koelbl (2020). With current performance and associated uncertainty in Turkish REITs, the need to protect Turkish REITs investors is highly essential.…”