On The Operating Performance of REITs Following Seasoned Equity Offerings: Anomaly Revisited

Abstract

We examine the operating performance of equity REITs following seasoned equity offerings from 1990–2007. This study uses a variety of measures of operating cash flow and documents improvements in industry-adjusted operating performance prior to issue and a statistically significant decline in these measures after issuance. The deterioration in operating performance of REITs is similar in magnitude to that found for industrial firms in prior studies. We find evidence of mean reversion in operating performance and timing by issuing firms, and that information asymmetry plays an important role in the results. Notably, in using a longer sample period and a variety of cash flow measures and benchmarks, this study finds evidence that is in contrast to results found in an earlier analysis of REIT operating performance

Financial Flexibility and At‐the‐Market (ATM) Equity Offerings: Evidence from Real Estate Investment Trusts

“…To provide a meaningful interpretation of how investors perceive this relatively new innovation in capital market access, we compare our ATM results to the well‐documented announcement effects around SEO activity. The prior literature on REIT SEOs documents significant negative announcement period returns between one and 2% (Howe and Shilling , Ghosh, Nag and Sirmans , Ghosh, Roark and Sirmans ). This negative reaction is consistent with both the signaling hypothesis, which suggests that investors expect managers to issue stock when it is relatively overvalued, and the perceived agency costs of free cash flow.…”

“…A number of prior studies have provided insight into how REITs make choices across financing vehicles (e.g., Ghosh, Nag and Sirmans 1997, Brown and Riddiough 2003, Ott, Riddiough and Yi 2005, Boudry, Kallberg and Liu 2010, Harrison, Panasian and Seiler 2011. REITs generally finance investment through access to bank lines of credit and private secured debt until these resources have been exhausted.…”

“…We follow the methodologies of Ghosh, Nag and Sirmans (1999) and Ghosh, Roark and Sirmans (2013) to calculate cumulative abnormal returns (CARs) over several announcement windows for both our ATM and SEO samples. To calculate CARs around announcement events, we first use a market model specification in which the daily return on the value-weighted CRSP index proxies for our return on the market.…”

How Do Firms Finance Nonprimary Market Investments? Evidence from REITs

“…Possible explanations of REIT capital structure include market timing (Boudry, Kallberg and Liu ; Ooi, Ong and Li ; Harrison, Panasian and Seiler ; Ghosh, Roark and Sirmans ), information asymmetry (Ghosh, Roark and Sirmans ) and trade‐off theory (Boudry, Kallberg and Liu ; Harrison, Panasian and Seiler ; Giacomini, Ling and Naranjo ). Harrison, Panasian and Seiler () find no evidence of financing pecking order.…”

Market discounts and shareholder benefits

“…For example, Ghosh et al (1999) find significant negative ARs around the event window [0, þ 1] in their study of US REITs. Ghosh et al (2013) finds negative and significant ARs in the days leading up to the announcement and the five days post and conclude that issuing REITs underperform when compared to non-issuing REITs. Ong et al (2011) also find significant negative ARs of À1.2 per cent over the [0, þ 1] event period for both Japan and Singapore REITs.…”