Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts

Abstract

While several studies have documented behavioral biases in the behavior of individual investors, very little is known about the existence of such biases in corporations. We utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of one of the most widely discussed biases, the disposition effect. Using property level REIT data, we find strong statistical evidence that REITs tend to sell winners and hold losers, where winners and losers are defined using changes in properties' prices since they were acquired. In addition, we find evidence that this behavior is consistent with the disposition effect. REITs are significantly less likely to sell properties that have a loss relative to a reference point based on inflation or historical average returns, controlling for the properties' recent returns. Our results also indicate that companies that show greater tendencies toward disposition effect behavior tend to sell winner properties at lower prices, all else equal. We find no support for three alternative explanations, optimal tax timing, mean reverting property-level returns, and asymmetric information. Finally, we find that the effect is stronger for smaller properties and that firms showing the strongest evidence of the disposition effect tend to be smaller firms with lower insider ownership.

Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications

“…But even the symmetrical reference‐point‐based pricing behavior may involve behavioral components. For example, the pricing behavior discovered here would be consistent with the “sell winners/hold losers” behavior referred to as the “disposition effect” and found by Crane and Hartzell (2009) in their study of REIT behavior. We will discuss these issues further in the next section about participants’ experience and in the sixth section where we quantify the historical magnitude of these pricing strategies during the 2000s’ commercial property market cycle 13…”

“…Odean 1998, Locke and Mann 2000, Feng and Seasholes 2005, Shapira and Venezia 2001). In the real estate literature, Crane and Hartzell (2009) find evidence for the disposition effect in real estate investment trusts (REITs). They find that managers of REITs are more likely to sell properties that have performed well and accept lower prices when selling profitable investments.…”

They Would If They Could: Assessing the Bindingness of the Property Holding Constraints for REITs

“…The local market return I use as a proxy, on the other hand, is very readily available. As stated in Crane and Hartzell (2007), in those instances where actual prices are available, the holding period return implied by these prices is correlated with the returns implied by the local market index at about 87%, so this seems to be a good proxy.…”

Real Estate Mutual Funds: Herding, Momentum Trading and Performance

“…Overall, our study adds evidence to answering the question about the relative transparency of REIT stock. It also reveals that in relation to both herding and momentum trading, REMFs exhibit investment behavior that is best explainable by the disposition effect, a dimension that—aside from the work of Crane and Hartzell ()—has not been pursued in the real estate decision‐making literature. We further show that while the interrelationships between herding, momentum trading and fund performance are complex, neither herding nor momentum trading are demonstrably superior investment strategies.…”

“…It is also driven by selling of winner stocks, the explanation for which lies in the disposition effect and more generally in “behavioral” representations of investor choice, deriving ultimately from prospect theory (Kahneman and Tversky ). Crane and Hartzell () discover the presence of the sell‐winners tendency in the decision making of REIT managers, when buying and selling the properties that underlie REIT stocks. Otherwise, while several studies attest the presence of such behavior in individual investors, few extend this into the kind of corporate environment inhabited by our fund managers.…”