Download An Examination of Primary and Secondary Market Returns in Equity

An Examination of Primary and
Secondary Market Returns in Equity REIT
IPOs
Authors
S i n a n G ok k a y a , M i c ha el J . H ig h fi e ld ,
Ke nn e th R o s ke ll ey, a nd D enn i s F. S t e ele , J r.
Abstract
We examine primary and secondary market returns for real estate
investment trust (REIT) initial public offerings (IPOs).
Consistent with theories regarding compensation for information
production during the roadshow, we find offer-to-open returns
are directly related to partial adjustment and are significantly
lower for REITs holding assets in a single property type.
Matching REIT IPOs to comparable non-REIT IPOs, we also
find evidence consistent with demand uncertainty. Specifically,
after controlling for issue and firm characteristics, REITs post
significantly lower secondary market returns despite similar
primary market returns. This indicates that demand uncertainty
resolves more quickly for REITs, possibly due to higher relative
transparency.
There have been a multitude of studies examining the initial market returns of
initial public offerings (IPOs); however, as in Loughran and Ritter (2004), most
of these studies focus on total underpricing, or offer-to-close returns (e.g., Ruud,
1993; Aggarwal, Krigman, and Womack, 2002; Loughran and Ritter, 2002; Lowry,
Officer, and Schwert, 2010). In the first study of its kind, Barry and Jennings
(1993) dissect total IPO underpricing into primary (offer-to-open) and secondary
(open-to-close) market returns and find that virtually all of the initial return is
consumed on the opening transaction, leaving no exploitable secondary market
returns for non-real estate investment trust (REIT) IPOs. More recently, Bradley,
Cooney, Jordan, and Singh (2009) find statistically and economically significant
open-to-close returns for a more recent sample of non-REIT IPOs and show that
both primary and secondary market returns are positively related to the degree of
information asymmetry associated with the IPOs.1
Unfortunately, as is common in the general IPO literature, all of the above papers
exclude REIT IPOs from their studies. In fact, while there is a considerable
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literature documenting economically and statistically significant underpricing for
REIT IPOs (Ling and Ryngaert, 1997; Buttimer, Hyland, and Sanders, 2005;
Hartzell, Kallberg, and Liu, 2005; Chan, Chen, and Wang, 2013), no previous
study dissects REIT IPO underpricing into its primary and secondary market
components.2
Although one could argue that a better understanding of the equity REIT IPO
underwriting market is an important question in itself due to the size of REITs as
an asset class (Capozza and Seguin, 2003), equity REITs should also serve as a
unique laboratory for investigating the implications of theories for underpricing
in the primary and secondary markets.
Given that information asymmetry is not directly observable, most non-REIT
empirical studies employ a wide range of proxies that are distinctly different and
might be contaminated by firm and industry-wide effects (Ljungqvist, 2006; Lee
and Masulis, 2009). Consistently, Bradley, Gonas, Highfield, and Roskelley (2009)
note that their information asymmetry variables may actually proxy for unmodeled
firm- and industry-specific characteristics.
Limiting a sample to equity REIT IPOs might mitigate the concerns about
unobserved firm- and industry-specific heterogeneity due to the equity REIT
business model and regulatory requirements. While equity REITs vary in property
focus, these minor differences in underlying asset structures are standardized and
easily classified. Furthermore, unlike technology companies, equity REITs invest
in tangible, income-generating assets, which are relatively easy to value. A REIT’s
real assets are typically listed in annual reports, in SEC filings, and often on firm
websites. Furthermore, equity analysts typically develop estimates of asset values
through standard conventions for occupancy and rental rates based on observable
geographic and other property information. That is, compared to most other
industries, REIT revenue estimation and overall firm valuation is less problematic.3
In addition, due to the 95% dividend payout requirement put in place by the Real
Estate Investment Trust Tax Provision of 1960, which was revised down to 90%
with the REIT Modernization Act of 1999, expected dividends are modestly
predictable. Although the REIT market is constantly changing, these factors
should theoretically reduce the agency problem of asset substitution and weaken
the asymmetric information problem between investors and issuers.4
This paper contributes to the existing IPO literature in several ways. First, in an
effort to shed more light on the REIT IPO underwriting market, and in contrast
to previous REIT IPO studies examining only underpricing, we focus on the
primary and secondary market components of underpricing. Examining primary
(offer-to-open) market returns, the findings show that, on average, about 97% of
the initial market return is consumed on the opening transaction for REIT IPOs
between 1993 and 2007. As a result, we find that the average secondary market
(open-to-close) return for equity REITs is not significantly different from zero.
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Thus, unlike recent evidence for non-REIT IPOs, the underpricing of REIT IPOs
is, on average, consumed in the primary market, leaving no opportunities for profit
in the secondary markets.
Second, investigating the cross-sectional determinants of underpricing in the
primary and secondary markets, we find that offer-to-open returns are directly
related to partial adjustment and demand uncertainty, but secondary market returns
are unrelated to these characteristics. The results also indicate that offer-to-open
returns are lower for REITs holding a portfolio of real estate assets in a single
property type at the time of issue, potentially due to fewer information asymmetry
problems, leading to lower price uncertainty for the REIT IPO. Overall, these
findings are consistent with the theories based on compensation to primary market
participants for information production and risk taking during the roadshow.5
Third, we compare the primary and secondary market returns of equity REIT IPOs
with traditional non-REIT IPOs in an effort to focus on the potential differences
in the relative transparency between the two types of issuers. Consistent with
previous studies, we find that total underpricing for REIT IPOs is significantly
lower than that observed for comparable non-REIT IPOs. Simply breaking
underpricing into its primary components, offer-to-open and open-to-close returns,
does not affect this result. However, after considering other factors known to
influence initial returns, our multivariate analysis shows that, in contrast to our
expectations, while primary market returns for REIT IPOs are not statistically
different from non-REITs after controlling for factors known to influence
underpricing, secondary market returns for REIT IPOs remain significantly lower
than those observed for their non-REIT IPO counterparts.
This finding is robust to alternative model specifications and could imply that
price uncertainty regarding the IPO resolves more quickly for REIT than nonREITs, an important issue because of the growing debate on the greater
transparency of REITs as an asset class (Feng, Ghosh, and Sirmans, 2007). Dolvin
and Pyles (2009) find smaller underpricing and price revisions for REIT IPOs and
attribute this finding to reduced information asymmetry.6 Thus, in line with
Ljungqvist (2006), when comparing REITs and non-REITs, the share price of a
typical equity REIT should be more easily ascertained in both the primary and
secondary markets than the stock price of the average non-REIT, potentially
because of greater information transparency and the tangible nature of REIT asset
holdings.
As a final component to our analysis, an examination of the secondary market
returns of REIT IPOs reveals a negative relation between open-to-hour and hourto-close returns, suggesting an aftermarket reversal that is not present in non-REIT
IPOs. In addition, these results persist only for the ‘‘cold’’ REIT IPO subsample,
consistent with the notion that intraday reversal might be due to price support by
underwriters.
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Literature Review
IPO Underpricing
The apparent underpricing of common shares in IPOs is well documented in
academic literature. The evidence indicates that this anomaly has been fairly
persistent through time. For example, Loughran and Ritter (2002) find an average
offer-to-close return of just over 14% for a sample of 3,025 firms for the period
1990 to 1998, while Ljungqvist (2006) finds an average first day return of around
19% since the 1960s. More recently, Bradley, Gonas, Highfield, and Roskelley
(2009) find an average total underpricing of just under 31% for the 1993–2003
period.
Many theorists and empiricists have long pondered why, on average, issuers and
their underwriters leave so much money on the table for investors in IPOs.
Numerous researchers have attempted to explain this well-documented finding. As
noted by Chan, Wang, and Yang (2009), most work in this area has been based
on asymmetric information between (1) issuers and underwriters, (2) between
issuers and investors, and (3) among underwriters, informed investors, and
uninformed investors. Unfortunately, the IPO literature almost exclusively reports
this topic in the context of underpricing, the percentage difference between the
offer price and first-day closing price. This is problematic because most theoretical
models used to explain this initial return typically build on asymmetric
information, institutional structure, or behavioral arguments, which are
concentrated in either the primary or secondary market.
The Primary Market. Building on Rock’s (1986) winner’s curse hypothesis,
Benveniste and Spindt (1989) develop a theory of IPO underpricing based on
information generation during the bookbuilding process. This ‘‘partial adjustment
model’’ considers underpricing as compensation to investors for revealing to the
underwriter private information, namely their true demand for an issue.7 The idea
is that the expected compensation to an investor who reveals honest information
about his or her demand for an issue must be greater than that of revealing
dishonest information, where the magnitude of compensation for information
generation should be higher for IPOs with greater ex ante information asymmetry
(Beatty and Ritter, 1986).
In order to reward primary market investors who truthfully reveal positive
information during the bookbuilding process, underwriters only partially adjust up
the final offer price, thus leading to an underpricing phenomenon. Therefore, in
line with the information acquisition theory, the reward to primary market
investors for truthfully revealing their demand should be realized upon the first
trade in the open market, leaving little to no subsequent average intraday returns
for secondary market participants.
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The Secondary Market. While the partial adjustment model can be used to explain
underpricing in the context of the primary market, some IPO models are predictive
about the behavior of allocated shares in the secondary market. In this study, we
group research regarding the initial secondary market trading of an IPO into two
broad categories: price support and demand uncertainty.
Benveniste, Busaba, and Wilhelm (1996) argue that underwriters may choose to
price support IPOs to bond with uninformed secondary market investors. This
price support censors the left-tail of the price distribution, thus generating a
positive secondary market return (Bradley, Gonas, Highfield, and Roskelley, 2009).
Alternatively, Lowry, Officer, and Schwert (2010) argue that a portion of IPO
underpricing in the primary market may be related to the uncertainty of the
market’s aggregate demand for an IPO’s shares. They document that the level of
IPO underpricing is associated with the volatility of IPO initial returns and tends
to be higher in firms that are more difficult to value. Consistent with this
hypothesis, Bradley, Gonas, Highfield, and Roskelley (2009) document that, on
average, investors that purchase shares at the start of trading return 2.3% over the
day. They note that almost the entire abnormal secondary market return occurs in
the first 30 minutes of trading as the demand uncertainty for the IPO shares is
resolved. They also document that IPOs that are more difficult to price tend to
have higher secondary market returns.
Since price support can obscure relations between IPO initial returns and firm and
market characteristics by truncating initial returns at zero, Bradley, Gonas,
Highfield, and Roskelley (2009) also report results for the top quartile of firms
sorted by offer-to-open returns. They find that the relation between initial
secondary market returns and beta is stronger in this sample, making price support
an unlikely explanation for the secondary market returns they observe. However,
they caution that beta may proxy for unobservable firm and industry heterogeneity,
not information asymmetries or aggregate demand uncertainty.
P r e v i o u s I P O U n d e r p r i c i n g S t u d i e s I n v o l v i n g R E I Ts
In one of the earliest REIT IPO studies to consider underpricing, Wang, Chan,
and Gau (1992) find a significant 22.82% offer-to-close return for the 1971–1988
period.8 Below, Zaman, and McIntosh (1995) examine a similar time period and
find an insignificant 20.89% offer-to-close return for the 1972–1988 period. These
researchers found REIT IPOs were typically overpriced, but subsequent legislative
acts, including the Tax Reform Act of 1986 (TRA86), which allowed active
management under the self-advised, self-managed structure, directly changed the
operations and investment attractiveness of the REIT industry.
As noted by Ling and Ryngaert (1997), the TRA93 allowed for increased
institutional ownership in REITs, bringing on an intense period of growth in the
REIT industry and creating a more diverse market of investors distributed among
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a better mix of informed (institution) and uniformed (individual) investors.9 Citing
Rock’s (1986) winner’s curse hypothesis, Ling and Ryngaert (1997) observe a
significant 3.60% offer-to-close return for equity REIT IPOs during the 1991–
1996 period. The next major change occurred through the REIT Simplification
Act of 1997 (RSA97), which allowed REITs to provide non-customary services
to tenants without disqualifying REITs from their tax-exempt status. As suggested
by Buttimer, Hyland, and Sanders (2005), growth in the underlying real estate
industry and the passage of TRA93 and RSA97 led to increased REIT IPO activity
(waves). They document significant initial returns of 5.39% for the 1993–1994
REIT IPO wave and 3.58% for the 1997–1998 wave.
The REIT Modernization Act of 1999 (RMA99) allowed REITs to establish
taxable REIT subsidiaries (TRS) to provide services to REIT tenants and others,
increasing efficiency and lowering expenses.10 The RMA99 also reduced the
minimum distribution requirement from 95% to 90% of taxable income. Five years
later, the REIT Improvement Act of 2004 (RIA04) eliminated the barrier to foreign
investors buying publicly listed REIT stock. It allowed REITs facing possible loss
of REIT status to either fix the mistake or pay a monetary penalty for violations
of REIT tax laws. Finally, the REIT Investment Diversification and Empowerment
Act of 2007 (RIDEA) provides for more efficient asset management and increased
the allowed size of taxable REIT subsidiaries.
Using IPO data from the ‘‘modern era,’’ Chan, Chen, and Wang (2013) investigate
the initial and long-run returns of 129 U.S. REITs and 241 international REITs
for the 1996–2010 period. They find a significant 2.78% raw initial return for
their sample of U.S. REITs, and a larger 3.48% raw initial return for international
REITs. Similarly, Bairagi and Dimovski (2011) find a 2.43% initial return for the
2002–2006 period. They also find an insignificant overpricing of 1.19% for the
2007–2010 period. Again, none of the REIT IPO studies discussed above segment
total underpricing into primary and secondary market components.
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Hypotheses and Data
Data Sources
We collect a sample of 126 equity REIT IPOs from the Thomson Financial
Securities Data Company (SDC) New Issues Database for the January 1, 1993 to
December 31, 2007 period.11 The size of the issue, exchange of listing, file range,
offer price, names and number of lead underwriters, and other issue characteristics
are obtained from the SDC database and verified by hand using SEC filings. The
SNL Financial REIT Datasource (SNL) is used to identify UPREITS, as well as
REIT property focus. Self-advised and self-managed REITs are identified in
Ambrose and Linneman (2001) for REIT IPOs prior to 1997, and SEC filings are
used for IPOs that take place after 1997. We also utilize SEC filings to determine
if issuing firms are ‘‘Blank Check REITs’’ or hold assets in a single property type
at the time of issue.12
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Open, close, and intraday hourly prices are obtained from the NYSE Trade and
Quote (TAQ) Database.13 Consistent with other IPO research, we use the Center
for Research on Security Prices to obtain the CRSP value-weighted index and the
(CRSP)/Ziman Real Estate Data Series for our post-issue estimations of beta. The
CRSP value-weighted index is also utilized to obtain the pre-issue standard
deviation of the value-weighed CRSP REIT Index. We also obtain Carter and
Manaster (1990) underwriter reputation rankings from Jay Ritter at the University
of Florida.14
Summary Statistics
We utilize the pricing variables obtained from SDC and TAQ to compute five IPO
return measures: total underpricing, offer-to-open, open-to-close, open-to-hour,
and hour-to-close. Total Underpricing is the percentage change between the offer
price and the close price on the first day of the IPO issue. While the mean and
median price changes are relatively minor when compared to the 30.8% offer-toclose return observed by Bradley, Gonas, Highfield, and Roskelley (2009), the
average underpricing for our sample is a statistically and economically significant
5.23%.15 We next dissect total underpricing into a primary and secondary market
component by utilizing the open price on the secondary market. Representing the
return in the primary market, the Offer-to-Open is the percentage change between
the offer price and the open price. We find an economically and statistically
significant 5.09% offer-to-open return for our sample of equity REIT IPOs; thus,
most underpricing is consumed in the first public trade on the market. While much
smaller in absolute magnitude, the relative proportion of underpricing dedicated
to the primary market for equity REITs (5.09 4 5.23 5 0.973) is statistically
larger than that noted by Bradley, Gonas, Highfield, and Roskelley (2009) for nonREIT firms (27.5 4 30.8 5 0.893).16
Representing the secondary market return, Open-to-Close is the percentage change
between the open price and the close price on the first day of trading. Unlike the
statistically significant 2.3% documented by Bradley, Gonas, Highfield, and
Roskelley (2009), the open-to-close returns observed for equity REIT IPOs are
not significantly different from zero. On average, an investor who purchases an
equity REIT IPO in the secondary market should expect no abnormal return over
the first trading day; however, examining the variations in open-to-close returns
for REIT IPOs, the findings show a substantial variation, with a range of 11.98%
and a sample standard deviation of 189 bps. Thus, we seek to investigate the
source of this variation in open-to-close returns in addition to primary market
returns, not to document that equity REIT secondary market returns are greater
than zero. In fact, almost one-fourth of the 126 equity REIT IPOs in our sample
(30) rise or fall by more than 2% over this first day of public trading.
Next, we decompose the aftermarket return into Open-to-Hour, the percentage
change between the open price and the transaction price observed closest to one
hour after the firm opens for trading on an exchange, and its compliment, HourJ R E R
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to-Close, the percentage change between the transaction price closest to one hour
after the open of a firm’s stock on an exchange to the close price on the first day
of trading.17 As one would expect, these values are relatively small, with median
values of zero, but the range remains relatively large.
Descriptive statistics for other conditioning variables previously shown to
influence underpricing are also presented in Exhibit 1. The proceeds of the offer
(Proceeds) for the average REIT IPOs during our sample period is $202 million,
with the largest issue bringing in just over $1.43 billion and the smallest garnering
only $10.8 million. The average percentage difference between the offer price and
the mid-point of the original file range, Partial Adjustment, is 23.59%, indicating
that firm underwriters, on average, set the offer price 3.59% below the mid-point
of the file range set in the initial prospectus. Again, there is a large amount of
variation in the sample with respect to partial adjustment, but the average observed
here for equity REITs is much lower than values observed for non-REIT IPOs.18
Bradley, Gonas, Highfield, and Roskelley (2009) suggest that an ex post beta
coefficient effectively proxies for the price uncertainty of an IPO. Accordingly,
building on the method employed by Bradley, Gonas, Highfield, and Roskelley
(2009), we utilize the CRSP REIT index and the six month (26 week) T-bill rate
to estimate the mean coefficient of the daily market risk premium.19 The resulting
ex post beta coefficient (Beta) serves as a proxy for the price uncertainty of the
IPO and averages only 0.466 for our sample of equity REITs.
While the level of volatility in the market is a gauge of the general level of
uncertainty in the market, Lowery and Shu (2002), Bradley, Gonas, Highfield, and
Roskelley (2009), and Chen, Fok, and Kang (2010) suggest that underpricing is
increasing in market volatility. Thus, similar to Chen, Fok, and Kang (2010), we
compute the daily standard deviation of the CRSP/Ziman REIT Index over the
125 trading days prior to the IPO [–125, 21] to be approximately 66 bps.
Similar to Friday, Howton, and Howton (2000), only 7.1% of our sample of equity
REITs is listed on the NASDAQ (NASDAQ), and approximately 61% of our
sample is priced on an integer (Offer Integer), a finding consistent with most other
IPO studies.20 It also appears that REITs typically retain highly active underwriters
as documented by an average underwriter reputation ranking of 8.08 on the Carter
and Manaster (1990) scale for the highest rated lead underwriter in the
underwriting syndicate. Lead Managers is the number of lead underwriters listed
on the IPO prospectus. We find that no issuer claimed more than three lead
managers, while most IPOs had only one.
Turning to organizational structure, 84.1% are structured as an umbrella
partnership REIT (UPREIT) at the time of offering, while 78.6% of the REITs in
the sample are classified as self-advised and self-managed (SASM) at the time of
their IPO. We also find that 71.6% of the firms held real assets of a single property
type, which is also consistent with the self-reported property focus on the
prospectus. The remaining 28.4% held multiple types of real estate assets (i.e.,
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E x h i b i t 1 u Descriptive Statistics
Variable
Mean
Median
Std. Dev.
Minimum
Maximum
Offer Price ($)
18.590
19.500
4.498
6.000
32.500
Open Price ($)
19.465
20.000
4.891
6.000
33.500
Hour Price ($)
19.468
19.875
4.556
6.125
33.500
Close Price ($)
19.485
19.750
4.909
6.250
32.625
Total Underpricing (%)
5.234
1.190
14.490
25.938
100.948
Offer-to-Open (%)
5.093
0.621
14.160
23.437
115.450
Open-to-Close (%)
0.122
0.000
1.824
25.208
6.771
Open-to-Hour (%)
20.012
0.000
0.568
23.543
3.754
Hour-to-Close (%)
0.080
0.000
1.463
23.774
7.895
Proceeds ($M)
202.617
157.500
159.667
10.800
1,432.167
Size (Ln($M))
18.900
18.943
0.699
16.195
20.997
File Range (%)
8.144
9.523
5.147
0.000
22.222
Partial Adjustment (%)
23.588
22.500
9.090
231.000
26.316
Beta (b)
0.466
0.443
0.288
20.184
1.253
Volatility (%)
0.667
NASDAQ (binary)
0.071
—
Offer Integer (binary)
0.611
—
Reputation (ordinal)
8.087
0.602
0.244
—
—
8.000
Lead Managers (cardinal)
1.189
SASM (binary)
0.786
—
UPREIT (binary)
0.841
—
Single Property Type (binary)
0.716
1.374
1.000
0.450
1.000
0.403
1.889
0.000
1.000
0.000
1.000
2.000
9.000
1.000
3.000
—
0.000
1.000
—
0.000
1.000
—
0.000
1.000
Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC Platinum
New Issues Database for the period January 1, 1993 to December 31, 2007. The number of
observations is 126. Offer Price is the price per share offered to primary investors. Open Price is
the price per share at the open of the secondary market the day of the REIT IPO. Close Price is the
price per share closest to 4:00 P.M. on the first day of trade in the secondary market. Total
Underpricing is the percentage change between the offer price and the closing price on the first
day of trading. Offer-to-Open is the percentage change from the offer price to the open price in
the secondary market on the first day of trading. Open-to-Close is the percentage change in the
open price to the close price in the secondary market on the first day of trade. Open-to-Hour is
the percentage change from the offer price to the market price closest to one hour after the IPO
opens for public trading in the secondary market. Hour-to-Close is the percentage change in the
market price closest to one hour after the IPO opens for public trading in the secondary market to
the close price in the secondary market on the first day of trade. Size is the natural logarithm of
Proceeds (millions) generated from the sale of securities in the IPO. File Range represents the
difference in the high and low prices in the prospectus file range divided by the midpoint of that
file range. Partial Adjustment is the percentage change from the middle of the original file range
to the offer price. Beta is the mean coefficient of the daily market risk premium as estimated on
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E x h i b i t 1 u (continued)
Descriptive Statistics
the daily excess return for the first six months of trading, where the market rate of return is
proxied by the CRSP REIT index and the risk-free return is proxied by the six month (26 week)
T-bill rate. Volatility represents the daily standard deviation of the CRSP REIT Index over the 125
trading days prior to the IPO [2125, 21] multiplied by 100 to represent a percentage. NASDAQ
is binary variable with a value equaling one if the firm was initially listed on the NASDAQ, zero
otherwise. Integer is a binary variable equal to one if the offer price is an integer, zero otherwise.
Reputation is the highest Carter and Manaster (1990) reputation ranking for the lead underwriters
of the issue. Lead Managers is the number of lead managers in the underwriting syndicate. SASM
is a binary variable equal to one if the REIT is listed as both self-advised and self-managed on the
S-3 filing, zero otherwise. UPREIT is a binary variable equal to one if the REIT is listed as an
UPREIT on the S-3 filing, zero otherwise. Single Property Type is a binary variable equal to one if
all properties owned by a REIT at the time of the IPO are in a single property classification, zero
otherwise. IPO characteristics, offer prices, open prices, hour prices, and close prices were
obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected
from Jay Ritter’s IPO website.
diversified REITs), held real estate assets inconsistent with the stated property
focus on the prospectus, or had no real assets at the time of issuance (i.e., ‘‘blank
check’’ REITs).
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Methods and Results
Univariate Analysis: Equity REIT Sample
We begin our analysis of equity REITs by performing a series of univariate sorts
to examine differences in the sample across time.21 In Panel A of Exhibit 2,
we show that in each sampled year, there is a non-negative value for total
underpricing, as well as an offer-to-open return for the average REIT IPO. Unlike
Bradley, Gonas, Highfield, and Roskelley’s (2009) findings for non-REIT IPOs,
we find that an average secondary market participant purchasing a REIT IPO
immediately after the opening earns no statistically significant return over the first
trading day for any year in the sample period.
Panel B of Exhibit 2 reports average IPO underpricing during the REIT IPO waves
documented by Buttimer, Hyland, and Sanders (2005) and Chan, Chen, and Wang
(2013) during our sample period. We also report average underpricing for the
IPOs issued during non-wave periods. In all windows considered, the total
underpricing consists primarily of the offer-to-open return. Although the mean
value is large, like Buttimer, Hyland, and Sanders (2005), we find no statistical
M a r k e t
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i n
E q u i t y
R E I T
I P O s
u
3 3
E x h i b i t 2 u Univariate Analysis: Sorts by Time
Total
Underpricing
N
Offer-to-Open
Return
Open-to-Close
Return
Hour-to-Close
Return
Panel A: Returns by year
1993
37
1994
35
1995
3
33.830
33.306
0.353
1996
5
4.271
4.750
20.449
1997
14
6.908***
6.477***
1998
5
4.337
5.361
1999
1
2000
0
—
—
—
—
2001
0
—
—
—
—
2002
2
0.100
0.200
20.100
20.139
2003
6
4.289
4.500*
20.210
20.660*
2004
9
2.021**
1.541
0.512
0.702
2005
7
0.751
0.629
0.102
20.465
2006
1
13.476
13.095
0.337
0.761
1
8.143
9.524
21.261
2.366
5.234***
5.093***
0.122
0.080
2007
Full sample of REIT IPOs
6.240*
3.204***
4.167
126
6.048*
0.133
0.131
3.099***
0.123
0.149
0.006
20.458*
0.360
0.009
20.971
20.373
0.00
4.167
2.041
Panel B: Returns by REIT IPO waves
Wave A: 199321994
72
4.765***
4.614***
0.128
0.140
Wave B: 199721998
19
6.231***
6.184***
0.009
20.092
Wave C: 200322005
22
2.235**
2.058**
0.184
20.041
0.143
0.201
0.122
0.080
Non-Wave Years
Full sample of REIT IPOs
13
126
11.449
5.234***
11.283
5.093***
Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC Platinum
New Issues Database for the period January 1, 1993 to December 31, 2007. Total Underpricing
is the percentage change between the offer price and the closing price on the first day of trading.
Offer-to-Open is the percentage change from the offer price to the open price in the secondary
market on the first day of trading. Open-to-Close is the percentage change in the open price to
the close price in the secondary market on the first day of trade. Hour-to-Close is the percentage
change in the market price closest to one hour after the IPO opens for public trading in the
secondary market to the close price in the secondary market on the first day of trade. Panel A
presents returns by the year of issue, and Panel B presents returns for the three REIT IPO waves
(1993–1994, 1997–1998, 2004–2005) documented by Buttimer, Hyland, and Sanders (2005).
IPO characteristics, offer prices, open prices, hour prices, and close prices were obtained from
SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected from Jay
Ritter’s IPO website.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
3 4
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
evidence that REIT IPOs are underpriced when REIT IPO issuance is low (nonwave years).
To further document any potential variation in our sample of equity REITs, in
Exhibit 3 we report total underpricing, offer-to-open, open-to-close, and hour-toclose returns based on several firm- and issue-specific characteristics. As noted by
Gokkaya, Hill, and Kelly (2013), it is possible that the level of information
asymmetry or cash flow risk embedded in an equity REIT is a function of its
property focus.22 As a result, in Panel A of Exhibit 3 we segment the REITs into
seven property focus categories.23 With the exception of the Healthcare and
Diversified/Specialized property types, all property groups post significant,
positive total underpricing and offer-to-open returns. We find no evidence of
significant secondary market returns for any property class with the exception of
the Residential group, which has a modest open-to-close return of 52.1 bps.
Residential REITs also have a statistically positive hour-to-close return of 44.6
bps, while Diversified/Specialized REITs have a statistically significant hour-toclose loss of 42.0 bps.
Classifying the REIT IPOs based on the property structure, Panel B of Exhibit 3
shows that REIT IPOs with a single property focus are associated with the lower
total underpricing relative to REITs IPOs investing in multiple property types.
Breaking down the total underpricing into its major components, our results show
that this result is driven by the primary returns and is unrelated to secondary
market returns.
Panel C of Exhibit 3 presents REITs based on their UPREIT classification. As
noted by Dolvin and Pyles (2009), the implementation of the UPREIT structure
in equity REITs may impact REIT IPO issuance costs and underpricing. A
structure first utilized by the Taubman Centers IPO in 1992, UPREITs are created
when one or more individuals provide the REIT with property holdings in
exchange for limited partnership interests, or operating units. While not recognized
formally as equity in the partnership, these operating units can be converted to
shares of stock in the UPREIT upon demand of the limited partner (Han, 2006).
Ghosh, Nag, and Sirmans (2000) find that seasoned equity offerings (SEOs)
by UPREITs are underpriced relative to REITs not structured as umbrella
partnerships. Chen and Lu (2006) find similar results for IPOs. These findings
support Ling and Ryngaert’s (1997) suggestion that the complexity of the UPREIT
structure increases the price uncertainty of the firm. Consistent with these studies,
we also find that UPREITs are significantly underpriced relative to ordinary
REITs. As one would expect, most of this underpricing comes in the form of
compensation to primary market participants through the offer-to-open return,
which is also significantly higher for UPREITs than non-UPREITs.
Prior to TRA86, a REIT was required to partner with external organizations to
(1) receive investment recommendations and (2) manage the properties held by
the REIT. These externally advised and externally managed REITs were
M a r k e t
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E q u i t y
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I P O s
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E x h i b i t 3 u Univariate Analysis: Sorts on Issue Characteristics
Total
Underpricing
N
Offer-to-Open
Return
Open-to-Close
Return
Hour-to-Close
Return
Panel A: Returns by REIT property focus
Healthcare
6
1.314
0.659
11
5.268*
4.099
9
3.638**
4.213*
Office
23
10.527**
Residential
24
2.491***
Retail
31
2.791***
3.037***
20.255
0.015
Diversified / Specialized
22
7.839
8.361
20.545
20.420*
Full sample of REIT IPOs
126
5.234***
5.093***
Hotel
Industrial
0.643
0.146
1.179
0.442
20.506
20.144
9.995**
0.454
0.159
1.948***
0.521*
0.446*
0.122
0.080
Panel B: Returns by REIT property focus: single vs. multiple
A) Single Property Type
90
2.701***
2.586***
0.126
0.046
B) Multiple Property Types
36
11.491***
11.287***
0.107
0.143
Difference (A–B)
126
28.790***
28.701***
0.019
20.097
Full sample of REIT IPOs
126
5.234***
5.093***
0.122
0.080
Panel C: Returns by UPREIT classification
A) UPREITs
106
5.988***
5.739***
1.235
1.670**
126
4.753**
126
5.234***
B) Non-UPREITs
20
Difference (A–B)
Full sample of REIT IPOs
0.227
0.144
20.440
20.258
4.069*
0.667
0.402
5.093***
0.122
0.080
Panel D: Returns by advisement / management combination (SASM)
A) SASM
B) Not SASM
108
5.493***
5.296***
0.170
0.116
18
3.679*
3.871***
20.168
20.135
Difference (A–B)
126
1.814
1.425
0.338
0.251
Full sample of REIT IPOs
126
5.234***
5.093***
0.122
0.080
4.906***
0.289*
0.189
22.050**
21.341**
Panel E: REIT IPOs based on exchange of listing
A) NYSE / AMEX
B) NASDAQ
117
5.220***
9
5.409
Difference (A–B)
126
20.189
Full sample of REIT IPOs
126
5.234***
7.517**
22.610
5.093***
J R E R
u
1.530***
22.338***
0.122
Vo l .
3 7
0.080
u
N o .
1 – 2 0 1 5
3 6
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
E x h i b i t 3 u (continued)
Univariate Analysis: Sorts on Issue Characteristics
N
Total
Underpricing
Offer-to-Open
Return
Open-to-Close
Return
Hour-to-Close
Return
Panel F: Returns by offer price relative to initial file range
A) Above File Range
12
B) Within File Range
68
16.667**
6.269***
C) Below File Range
46
Difference (A–B)
80
Difference (B2C)
114
Difference (A–C)
58
126
5.234***
Full sample of REIT IPOs
0.721**
10.397*
15.780**
0.682
0.916
6.148***
0.117
20.010
0.745***
20.018
20.006
9.632*
0.565
0.926*
5.548**
3.968**
0.135
15.944***
15.035***
0.700
0.922**
5.093***
0.122
0.080
20.004
Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC Platinum
New Issues Database for the period January 1, 1993 to December 31, 2007. Total Underpricing
is the percentage change between the offer price and the closing price on the first day of trading.
Offer-to-Open is the percentage change from the offer price to the open price in the secondary
market on the first day of trading. Open-to-Close is the percentage change in the open price to
the close price in the secondary market on the first day of trade. Hour-to-Close is the percentage
change in the market price closest to one hour after the IPO opens for public trading in the
secondary market to the close price in the secondary market on the first day of trade. Healthcare,
Hotel, Industrial, Office, Residential, and Retail represent equity REITs with assets that are related
to healthcare, hospitality, industrial, office rentals, multi-family rental units, regional malls, and
shopping centers, respectively. Diversified / Specialized represents equity REITs with assets related
to diversified real asset holdings, self-storage properties, and specialty properties, such as
correctional facilities. Above File Range represents firms whose offer prices were above the
original file range. Within File Range represents firms whose offer price was within the original
file range, and Below File Range represents those firms whose offer prices were below the initial
file range. IPO characteristics, offer prices, open prices, hour prices, and close prices were
obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected
from Jay Ritter’s IPO website.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
essentially pass-through investment vehicles. With the passage of TRA86, many
REITs brought both the advisement and management functions in house to
become self-advised/self-managed (SASM) REITs. Building on Capozza and
Sequin (2000), Chen and Lu (2006) find lower IPO gross spreads for SASM
REITs, suggesting that SASM REITs are informationally more transparent than
non-SASM REITs. Alternatively, as shown in Panel D of Exhibit 3, we find that
total underpricing and offer-to-open returns are larger for SASM REITs as
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compared to non-SASM REITs, but the difference between the two groups is not
statistically significant.24
Turning to more traditional IPO underpricing variables, as shown in Panel E of
Exhibit 3, the vast majority of REITs are listed on the NYSE/AMEX. Although
not explicitly noted in previous REIT IPO studies, this finding is consistent with
REIT SEO studies such as Friday, Howton, and Howton (2000). There is no
statistical difference between NYSE/AMEX and NASDAQ issues in terms of total
underpricing and offer-to-open returns, but ‘‘big board’’ REIT IPOs generate a
positive and significant open-to-close return of 28 bps. On the other hand, the
NASDAQ-listed REIT IPOs post an economically and statistically significant
22.05% (21.34%) open-to-close (hour-to-close) return. Both secondary market
return measures are significantly lower for NASDAQ IPOs relative to NYSE/
AMEX IPOs.
Finally, in Panel F of Exhibit 3 we report the relation between the offer price and
the mid-point of the original file range established by underwriters. Hanley (1993)
was the first to document that revisions to the IPO’s file range are positively
correlated to underpricing in the primary market. Consistent with her model, REIT
IPO firms whose underwriters set the offer price above the original file range post
a significant 16.7% total underpricing. This value declines monotonically as the
offer price is placed within the original file range and then below it. Primary
market returns virtually mirror the underpricing returns, and the differences in
average underpricing and offer-to-open return between file range groups are
statistically significant. Revisions to the file range also seem to be positively
correlated to average open-to-close and hour-to-close returns, but the relation is
not statistically significant. However, in examining intraday returns, we find that
issues priced above the file range generate hour-to-close returns about 92 bps
higher than those issues priced within or below the file range.
Multivariate Analysis: Equity REIT Sample
Bradley, Gonas, Highfield, and Roskelley (2009) document that, on average,
primary market investors who purchase a non-REIT IPO at the offer price earn
an offer-to-close return of 30.78% over the first trading day. Segmenting this total
underpricing, they find that the primary market investor who sold at the open
earned an average return of 27.50%, leaving only 2.35%, on average, to the
aftermarket investor who bought at the open and sold at the close on the first day
of trading.25
Consistent with the findings of Lowry, Officer, and Schwert (2010) on total
underpricing, Bradley, Gonas, Highfield, and Roskelley (2009) show that more
difficult to price IPOs experience larger returns on the first day of trading. They
relate this relatively larger open-to-close return to the aggregate demand
uncertainty for the IPO shares that specialists and dealers face as the IPO opens
for trading. They also show that aggregate market volatility (market uncertainty),
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
3 8
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
beta (information asymmetries), and firm size (firm risk) influence both the
primary and secondary market returns for non-REIT IPOs. They argue that these
variables proxy for the difficulty in pricing a firm. However, they caution that beta
may actually proxy for unmodeled heterogeneity and not information asymmetries
for non-REIT IPOs. Therefore, we construct the following multivariate regression
model to estimate the determinants of total underpricing and its component
returns:
Returnm,i 5 am,i 1 b1,m Partial Adjustmenti 1 b2,m Sizei
1 b3,m Integer 1 b4,m NASDAQi
1 b5,m Reputationi 1 b6,m Lead Managersi
1 b7,m Betai 1 b8,m Volatilityi
1 b9,m UPREITi 1 b10,m SASMi
1 b11,m Wavei 1 b12,m Single Property Typei
1 b13,m Heathcarei 1 b14,m Hoteli
1 b15,m Industriali 1 b16,m Officei
1 b17,m Residentiali 1 b18,m Retaili 1 «m,i ,
(1)
where Returnm,i is the return measure m for REIT IPO i.26 As discussed previously,
the four individual return measures, m, are as follows: Total Underpricing, Offerto-Open, Open-to-Close, or Hour-to-Close. Turning to the independent variables,
Bradley, Gonas, Highfield, and Roskelley (2009) show that the percentage
difference in the offer price and the midpoint of the file range, Partial Adjustment,
is positively related to the total, primary, and secondary market IPO returns, a
finding documented for total underpricing by Hanley (1993) as based on the work
of Benveniste and Spindt (1989).
Consistent with Bradley, Gonas, Highfield, and Roskelley (2009), Lowry, Officer,
and Schwert (2010), and Chen, Fok, and Lu (2011), Size, the natural logarithm
proceeds (millions) generated from the sale of securities in the IPO, is included
to proxy for smaller firms that are theoretically more difficult to price due to
greater information asymmetry.27 Given that Bradley, Cooney, Jordan, and Singh
(2004) find that IPOs priced on an integer have greater underpricing, presumably
due to uncertainty about the value of the firm and negotiations between the
underwriter and issuer, we include Integer, a binary variable equal to one if the
offer price is an integer, zero otherwise. Since the NASDAQ and NYSE have
different IPO opening trade mechanisms and listing requirements, we include
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NASDAQ, a binary variable with a value equal to one if the firm was initially
listed on the NASDAQ, zero otherwise.
Loughran and Ritter (2004) find that underwriters with more experience and
greater reputation are more likely to underprice IPOs; thus, as a control, we
include the variable Reputation, the Carter and Manaster (1990) measure of lead
underwriter quality represented on an ordinal scale from one (lowest) to nine
(highest) for the year the REIT went public.28 Recognizing that multiple
underwriters may generate more information during the due diligence process, we
also include the natural logarithm of the number of lead underwriters of the issue,
Lead Managers. Next, Bradley, Gonas, Highfield, and Roskelley (2009) suggest
that the ex post beta coefficient proxies for the price uncertainty of the IPO. As
a result, we include Beta, the mean coefficient of the daily market risk premium
as estimated on the daily excess return for the first six months of trading. The
market rate of return is proxied by the CRSP REIT index, and the risk-free return
is proxied by the six month (26 week) T-bill rate.
If Bradley, Gonas, Highfield, and Roskelley’s (2009) results for Beta do not
represent asymmetric information but instead reflect unmodeled firm
heterogeneity, as they caution, then reducing the heterogeneity in the sample might
eliminate the relations they document. Their warning is particularly resonant given
they do not control for industry effects. We suggest that limiting our sample to
equity REITs might reduce the impact of unobserved firm and industry-wide
heterogeneity on inferences.
Lowery and Shu (2002), Bradley, Gonas, Highfield, and Roskelley (2009), and
Chen, Fok, and Kang (2010) suggest that underpricing is increasing in market
volatility. Thus, similar to Chen, Fok, and Kang (2010), we include Volatility, the
daily standard deviation of the CRSP REIT Index over the 125 trading days prior
to the IPO [–125, –1] multiplied by 100 to represent a percentage.29
While restricting attention to equity REITs will reduce variation in the level of
asymmetric information and unmodeled firm heterogeneity as compared to a
typical sample of non-REIT IPOs, the variation is not fully eliminated. For
instance, Ghosh, Nag, and Sirmans (2000) and Dolvin and Pyles (2009), among
others, have shown that REIT organizational structure impacts security issuance.
To address these and other industry-specific concerns, we include a series of binary
variables.
UPREIT is a binary variable equal to one for UPREITs, zero otherwise, which
controls for the unique tax advantages and added financing flexibility enjoyed by
UPREITs (see Hartzell et al., 2008). Since Chen and Lu (2006) and Ambrose and
Linneman (2001) note that the management structure may be related to agency
problems which may impact security issuance, we also include the binary variable
SASM, which is set equal to one for REITs that are self-advised and self-managed,
zero otherwise. Consistent with Buttimer, Hyland, and Sanders (2005) and
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
4 0
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
Hartzell, Kallberg, and Liu (2005), we include a binary variable, Wave, to identify
IPOs that take place in wave periods of 1993–1994 and 1997–1998, as well as
IPOs taking place in 2004–2005.
Recognizing that REIT IPOs holding assets in a single property subtype at the
time of issuance may pose fewer information asymmetries than ‘‘blank check’’
REITs or REITs with property holdings in multiple property type classifications,
we include the binary variable Single Property Type.30 Similarly, building on
Gokkaya, Hill, and Kelly (2013), who suggest that the riskiness of REIT cash
flows and associated potential adverse selection problems may be a function of
the type of underlying real assets held by the firm, we include controls for
differences across property focus types. Specifically, Residential, Retail,
Industrial, Office, Healthcare, and Hotel denote the respective conventional REIT
property focus variables. The binary variable Diversified/Specialized, which
equals one for specialized or diversified REITs, zero otherwise, is the omitted
reference group in our multivariate models.
Finally, it is possible that large price changes in the first hour of secondary market
trading may indicate greater aggregate demand uncertainty due to, among other
things, the underwriter’s underestimation of retail and/or institutional demand.
Therefore, we include the variable Open-to-Hour (not shown in Equation 1),
defined as the percentage change from the open price to the market price closest
to one hour after the IPO opens for public trading in the secondary market, when
estimating the determinants of hour-to-close returns.
Exhibit 4 provides the multivariate analysis for the first day returns of our sample
of REIT IPOs. Consistent with the general IPO literature, we find that the
percentage difference in the offer price, the mid-point of the IPO file range (Partial
Adjustment), and risk (Beta) are positively correlated with underpricing and offerto-open, or primary market, returns. While the underpricing and primary market
effects for these variables are economically significant, unlike Bradley, Gonas,
Highfield, and Roskelley’s (2009) examination of the non-REIT market, neither
of these variables provide explanatory power to the average open-to-close or hourto-close returns in the REIT IPOs secondary-market.31 Consistent with the notion
that smaller firms pose greater information asymmetries, the coefficient on Size is
also negatively related to underpricing and offer-to-open returns but not related to
either aftermarket return measure. In general, all of these findings are consistent
with the information acquisition model of Benveniste and Spindt (1989) and show
that primary market participants are rewarded for their information production
during the registration process.
Other results from Exhibit 4 also deserve attention. First, NASDAQ REITs post
offer-to-open returns approximately 7.30% higher than that of NYSE/AMEX
returns after controlling for other characteristics of the IPO. This coefficient then
reverses to a significant 21.90% for open-to-close returns. While the positive
offer-to-open return is much larger than that observed in Bradley, Gonas,
Highfield, and Roskelley (2009), the negative open-to-close return is consistent
with what they observed for the 1999–2000 period.
E x h i b i t 4 u Multivariate Analysis of First Day Returns for REITs
Offer-to-Open (%)
Variable
Estimate
P-value
Estimate
Intercept
151.193
0.116
152.450
Partial Adjustment (%)
Estimate
P-value
Estimate
P-value
0.108
21.586
0.857
22.229
0.765
0.023
0.207
0.020
0.224
28.070*
0.097
20.130
0.740
0.176
0.576
Integer (binary)
23.280
0.224
23.109
0.241
20.146
0.675
20.275
0.363
5.274
0.275
0.099
21.997*
0.051
21.683**
0.017
7.293*
J R E R
1.994
0.194
1.927
0.199
0.045
0.740
20.058
0.605
23.975
0.485
24.506
0.423
0.576
0.502
0.566
0.533
0.054
6.714**
0.050
20.456
0.652
20.216
0.777
0.865
0.938
1.717
0.867
0.564
0.817
0.313
0.860
0.090
0.100
0.386
0.382
0.168
0.617
12.258*
0.062
10.389
0.109
1.761*
0.054
0.260
0.697
0.404
214.519
Wave (binary)
5.961*
20.449
0.340
20.319
0.336
Healthcare (binary)
25.492
0.495
26.147
0.435
0.663
0.321
0.862
0.119
Hotel (binary)
10.142*
0.087
6.376
0.266
3.643***
0.002
1.835*
0.063
Industrial (binary)
26.289
0.463
25.780
0.498
0.584
0.105
0.837
20.364
4 1
0.658
0.079
u
20.889
28.696*
I P O s
0.412
0.067
212.146
R E I T
2.010
29.286*
u
0.299
Single Property Type (binary)
1 – 2 0 1 5
6.378*
SASM (binary)
N o .
3 7
UPREIT (binary)
E q u i t y
Vo l .
6.273 *
Volatility (%)
i n
u
Beta (b)
R e t u r n s
0.008
0.099
Lead Managers (Ln(#))
0.319***
P-value
28.247*
Reputation (ordinal)
0.006
Hour-to-Close (%)
Size (Ln($M))
NASDAQ (binary)
0.344***
Open-to-Close (%)
M a r k e t
Total Underpricing (%)
4 2
u
G o k k a y a ,
E x h i b i t 4 u (continued)
Multivariate Analysis of First Day Returns for REITs
Office (binary)
Offer-to-Open (%)
Estimate
Estimate
P-value
0.938
20.607
P-value
0.913
20.842
Open-to-Close (%)
Hour-to-Close (%)
Estimate
Estimate
P-value
0.273
0.609
P-value
0.509
0.271
Residential (binary)
24.193
0.547
24.973
0.472
0.796
0.116
0.954**
0.021
Retail (binary)
26.962
0.375
26.851
0.379
20.041
0.940
0.360
0.415
Year Fixed Effects
0.052
20.246*
Yes
Yes
Yes
Yes
R2
0.369
0.367
0.320
0.281
Adj. R2
0.178
0.176
0.115
0.054
a n d
S t e e l e
Notes: This Exhibit provides the multivariate analysis on returns for the sample of 126 equity REIT IPOs for the period January 1, 1993, to December 31,
2007. The sample of equity REIT IPOs was obtained from Thomson Financial’s SDC Platinum New Issues Database. The dependent variables are Total
Underpricing, Offer-to-Open, Open-to-Close, and Hour-to-Close. See the notes to Exhibits 1–3 for variable definitions. The number of observations is 126.
We control for year fixed effects in all the models (not reported to conserve space). P-Values are calculated using White’s (1980) heteroscedasticity-consistent
standard errors (HCSEs) and are presented to the right of the coefficient estimate. IPO characteristics, offer prices, open prices, hour prices, and close prices
were obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected from Jay Ritter’s IPO website.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
R o s k e l l e y,
Open-to-Hour (%)
H i g h f i e l d ,
Variable
Total Underpricing (%)
M a r k e t
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
4 3
Second, as to REIT-specific heterogeneity, it appears that both the UPREIT and
SASM management structures play a statistically marginal but economically large
role in total underpricing. Decomposing this finding in the offer-to-open and opento-close models yields additional results. The UPREIT structure is positively
related to offer-to-open returns, a finding consistent with Han’s (2006) suggestion
that UPREIT investors face increased information asymmetries that accompany
the partnership structure, but are not related to open-to-close or hour-to-close
returns. On the other hand, open-to-close returns are positively correlated with
SASM status but unrelated to offer-to-open returns. While organizational structure
could play a role in information asymmetry at the time of issue, leading to price
uncertainty consistent with the results presented, evidence by Capozza and Seguin
(2000) shows that internally advised REITs consistently outperform externally
advised REITs.
Third, turning to an additional measure of REIT information transparency, the
analysis reveals that offer-to-open returns are lower for REITs holding only assets
consistent with a single property focus at the time of the IPO (Single Property
Type). This finding is consistent with the notion that the homogeneity of firm
assets at the time of IPO reduces information asymmetries and leads to lower
price uncertainty for the IPO. Once again, and consistent with theories based on
compensation to primary market participants, open-to-close returns are unrelated
to the property focus of the REIT IPOs.
Finally, in the last column of Exhibit 4, we present a model of the determinants
of hour-to-close returns. We include the open-to-hour return in this model to
identify intraday reversals. As shown, we indeed find evidence of a weak reversal
during the trading day, a finding that may be evidence of price support by lead
underwriters. We investigate this finding in more detail below.32
U n i v a r i a t e A n a l y s i s : E q u i t y R E I Ts a n d M a t c h e d
N o n - R E I Ts
In addition to examining the cross-sectional determinants of total underpricing and
its return components solely in the context of REITs, we now turn our attention
to a comparison of REIT IPOs and their non-REIT counterparts. Similar to Dolvin
and Pyles (2009), we match our sample of REIT IPOs with non-REIT IPOs based
on similar size (proceeds) within 530 days of the REIT IPO issuance. Four of
the original 126 REIT IPOs did not have a match with all variables available.33
This reduces the sample to 244 IPOs: 122 REIT IPOs and 122 corresponding nonREIT IPOs.34
Exhibit 5 presents the difference in means for our sample of equity REIT IPOs
and the matched sample of non-REIT IPOs for all variables of interest. Given that
the matching methodology was based on size (Proceeds), we find no significant
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
4 4
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
E x h i b i t 5 u Difference in Means Analysis: Equity REIT IPOs vs. Matched Non-REIT IPOs
Variable
Offer Price ($)
Equity REIT IPOs
(A)
18.757
Matched Non-REIT IPOs
(B)
16.382
Difference
(A–B)
2.375***
Open Price ($)
19.637
18.376
1.261*
Hour Price ($)
19.639
18.546
1.093
Close Price ($)
19.657
18.787
0.870
5.260
14.564
29.304***
Offer-to-Open (%)
5.121
11.389
26.268***
Open-to-Close (%)
0.119
2.579
22.460***
Total Underpricing (%)
Open-to-Hour (%)
0.039
0.057
20.018
Hour-to-Close (%)
0.083
1.685
21.602***
28.533***
Partial Adjustment (%)
Proceeds
Size (Ln($M))
23.271
5.262
201.316
192.102
9.214
18.892
18.758
20.134
Integer (binary)
0.598
0.705
20.107*
NASDAQ (binary)
0.073
0.459
20.385***
Reputation (ordinal)
8.121
8.665
20.544***
Lead Managers (cardinal)
1.179
1.202
20.023
Beta (b)
0.467
1.138
20.671***
Volatility (%)
0.659
0.519
0.140***
Notes: This exhibit provides a difference in means analysis for the sample of 122 equity REIT IPOs
and a matched sample of 122 non-REIT IPOs for the period January 1, 1993 to December 31,
2007. The sample of equity REIT IPOs and matching non-REIT IPOs was obtained from Thomson
Financial’s SDC Platinum New Issues Database. Similar to Dolvin and Pyles (2009), REIT IPOs are
matched with non-REIT IPOs with the most similar size (proceeds) within 530 days of REIT IPO
issuance. Four of the original 126 REIT IPOs did not have a match with all variables available.
One matching firm did not have hourly price observations; thus, both the REIT and the matching
firm were dropped from the analysis when hourly prices were needed. For REITs, Beta is the mean
coefficient of the daily market risk premium as estimated on the daily excess return for the first six
months of trading, where the market rate of return is proxied by the CRSP REIT index and the riskfree return is proxied by the six month (26 Week) T-Bill rate. For non-REITs, Beta is computed
using the CRSP value-weighted index as the proxy for the market rate of return. See the notes to
Exhibits 1–3 for other variable definitions. Carter-Manaster reputation rankings were collected
from Jay Ritter’s IPO website. The difference between equity REITs and the matched sample is
evaluated using a simple t-test.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
M a r k e t
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
4 5
difference in the samples for the variables Proceeds and Log Size. Along with the
intraday variables of Hour Price and Close Price, the size-related variables are
the only descriptive variables for the REIT IPO sample that do not post a
statistically different mean than the matched non-REIT IPO sample.
Turning to our variables of interest, we find that REIT IPOs post an average total
underpricing that is 9.3% below their matched non-REIT counterparts. Likewise,
offer-to-open and open-to-close returns are 6.2% and 2.4% lower, respectively, for
REITs versus non-REITs. After noting the significantly lower underpricing and
offer-to-open returns for REITs, we find that the percentage adjustment in the
offer price relative to the midpoint of the file range (Partial Adjustment) is 8.5%
lower for REIT IPOs than non-REIT IPOs, indicating a lower level of information
production during the registration for REIT IPOs. Like Cotter and Roll (2011),
the REIT betas are significantly smaller than those for the non-REITs.
M u l t i v a r i a t e A n a l y s i s : E q u i t y R E I Ts a n d M a t c h e d
N o n - R E I Ts
We examine the determinants of total underpricing and its return components in
a pooled multivariate framework. We begin by estimating the following baseline
model:
Returnm,i 5 am,i 1 b1,m REITi 1 b2,m Partial Adjustmenti
1 b3,m Sizei 1 b4,m Integeri 1 b5,m NASDAQi
1 b6,m Reputationi 1 b7,m Lead Managersi
1 b8,m Betai 1 b9,m Volatilityi 1 «m,i .
(2a)
REITi is a binary variable equal to one for REIT IPOs, zero otherwise.35 This
equation is qualitatively similar to Equation (1) with the exception of the addition
of the REIT variable and the elimination of REIT-specific control variables, such
as UPREIT, SASM, Wave, Single Property Type, and the property focus binary
variables.
As shown in Column (1) in Panel A of Exhibit 6, after controlling for the various
factors shown previously to influence total underpricing in non-REIT IPO studies,
the level of underpricing for REIT IPOs is not statistically different from that of
non-REITs. That is, the 930 bps difference in underpricing between REITs and
non-REITs found in Exhibit 5 is effectively explained by IPO firm characteristics,
which have been shown in previous IPO studies to impact underpricing. In Column
(2), we find similar results for offer-to-open returns. Again, the finding from
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
4 6
u
Variable
Offer-to-Open (%)
Estimate
P-value
Estimate
(1)
(2)
(3)
Open-to-Close (%)
Hour-to-Close (%)
P-value
Estimate
P-value
Estimate
P-value
(4)
(5)
(6)
(7)
(8)
Panel A: Base model—full sample without REIT-specific variables
Intercept
REIT (binary)
0.021
87.589**
0.044
27.814**
0.028
16.264***
0.007
20.761
0.774
21.425
0.520
22.231***
0.002
21.049***
0.004
0.000
0.063**
0.014
0.027*
0.065
0.456***
0.000
0.383***
Size (Ln($M))
27.298**
0.025
25.306**
0.039
21.210*
0.092
20.834**
0.014
Integer (binary)
26.409***
0.007
24.916**
0.031
21.320**
0.029
20.636*
0.061
NASDAQ (binary)
3.483
0.162
1.789
0.379
Reputation (ordinal)
1.834*
0.081
1.855**
0.033
Lead Managers (Ln(#))
0.484
1.543*
20.174
0.088
0.633
0.238
0.600
0.013
0.942
1.673
0.251
0.448
0.562
3.987***
0.006
4.598***
0.000
20.798
0.225
0.337
0.394
Volatility (%)
1.453
0.848
0.446
0.933
1.664
0.459
22.481
24.130
Year Fixed Effects
Observations
Yes
244
Yes
244
Yes
244
1.748
0.254
0.114
0.135
Yes
242
R2
0.372
0.349
0.263
0.266
Adj. R2
0.312
0.287
0.193
0.192
S t e e l e
Open-to-Hour (%)
a n d
0.256
Beta (b)
R o s k e l l e y,
Partial Adjustment (%)
129.152**
H i g h f i e l d ,
Total Underpricing (%)
G o k k a y a ,
E x h i b i t 6 u Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs
E x h i b i t 6 u (continued)
Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs
Variable
Offer-to-Open (%)
Estimate
P-value
Estimate
(1)
(2)
(3)
Open-to-Close (%)
Hour-to-Close (%)
P-value
Estimate
P-value
Estimate
P-value
(4)
(5)
(6)
(7)
(8)
Panel B: Base model—full sample with REIT-specific variables
148.315**
0.013
103.955**
0.029
30.031**
0.023
17.516***
0.004
REIT (binary)
212.575
0.222
24.994
0.567
26.609**
0.020
23.054**
0.047
0.025*
0.094
28.208**
0.017
26.073**
0.027
21.326*
0.072
20.903***
0.009
Integer (binary)
25.847***
0.007
24.487**
0.028
21.217**
0.049
20.587*
0.098
4.073*
0.095
2.180
0.284
1.706*
0.056
0.712
0.181
E q u i t y
u
0.025
Size (Ln($M))
i n
J R E R
Partial Adjustment (%)
NASDAQ (binary)
0.451***
0.000
0.373***
0.000
0.059**
R e t u r n s
Intercept
M a r k e t
Total Underpricing (%)
3.357**
0.021
4.044***
0.002
20.864
0.199
0.308
0.442
Volatility (%)
2.361
0.770
2.781
0.623
1.245
0.581
1.558
0.292
Lead Managers (Ln(#))
1.832*
22.417
0.084
0.534
1.850**
23.915
0.038
20.168
0.616
0.022
0.908
0.391
1.564
0.294
0.379
0.643
0.081
4.400
0.150
1.310*
0.069
0.451
0.271
7.018*
0.076
5.374
0.119
1.149
0.269
0.456
0.547
26.449
0.422
26.651
0.395
0.292
0.834
0.748
0.445
Single Property Type (binary)
28.210*
0.058
27.568*
0.080
20.515
0.342
20.447
0.219
4 7
Wave (binary)
u
1 – 2 0 1 5
5.782*
SASM (binary)
I P O s
N o .
UPREIT (binary)
R E I T
3 7
Beta (b)
u
Vo l .
Reputation (ordinal)
4 8
u
G o k k a y a ,
E x h i b i t 6 u (continued)
Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs
Offer-to-Open (%)
Estimate
P-value
Estimate
(1)
(2)
(3)
Open-to-Close (%)
Hour-to-Close (%)
P-value
Estimate
P-value
Estimate
P-value
(4)
(5)
(6)
(7)
(8)
Open-to-Hour (%)
Year Fixed Effects
Observations
0.109
Yes
244
Yes
244
Yes
244
0.151
Yes
242
0.410
0.389
0.273
0.274
Adj. R2
0.341
0.319
0.189
0.186
a n d
S t e e l e
Notes: This exhibit provides the multivariate analysis for the sample of 122 equity REIT IPOs and a matched sample of 122 non-REIT IPOs for the period
January 1, 1993 to December 31, 2007. The sample of equity REIT IPOs and matching non-REIT IPOs was obtained from Thomson Financial’s SDC Platinum
New Issues Database. Similar to Dolvin and Pyles (2009) REIT IPOs are matched with non-REIT IPOs with the most similar size (proceeds) within 1 / 230
days of REIT IPO issuance. Four of the original 126 REIT IPOs did not have a match with all variables available. One matching firm did not have hourly
price observations; thus, both the REIT and the matching firm were dropped from the analysis when hourly prices were needed. The dependent variables are
Total Underpricing, Offer-to-Open, Open-to-Close, and Hour-to-Close. See the notes to Exhibits 1–3 and 5 for variable definitions. We control for year fixed
effects (not reported to conserve space) in all models. P-Values are calculated using White’s (1980) heteroscedasticity-consistent standard errors (HCSEs). IPO
characteristics, offer prices, open prices, hour prices, and close prices were obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation
rankings were collected from Jay Ritter’s IPO website.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
R o s k e l l e y,
R2
H i g h f i e l d ,
Variable
Total Underpricing (%)
M a r k e t
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
4 9
Exhibit 5 showing that REITs post average open-to-close returns are 627 bps lower
than non-REITs is effectively explained by the other dependent variables, most
notably partial adjustment, size, integer, underwriter reputation, and risk (Beta).
While the primary market returns for both non-REIT and REIT IPOs are
statistically similar, open-to-close and hour-to-close returns exhibit a different
story. After controlling for IPO issuance and market characteristics, we find that
REIT IPOs are associated with significantly lower secondary market returns
compared to non-REIT IPOs. The results show that REIT IPOs post open-to-close
and hour-to-close returns that are, on average, 223 bps and 105 bps lower than
non-REIT IPOs, respectively. This finding is statistically significant and
economically large. The remaining variables are consistent in sign and significance
with Bradley, Gonas, Highfield, and Roskelley (2009).
To control for various REIT-specific characteristics, in Panel B of Exhibit 6 we
present the results of the following model:
Returnm,i 5 am,i 1 b1,m REITi 1 b2,m Partial Adjustmenti
1 b3,m Sizei 1 b4,m Integeri 1 b5,m NASDAQi
1 b6,m Reputationi 1 b7,m Lead Managersi
1 b8,m Betai 1 b9,m Volatilityi 1 b10,m UPREITi
1 b11,m SASMi 1 b12,m Wavei
1 b12,m Single Property Typei 1 «m,i .
(2b)
This equation is the same as Equation (2a) except for the inclusion of the REITspecific variables: UPREIT, SASM, Wave, and Single Property Type.36
Inclusion of the REIT-specific binary variables does not alter the general findings.
There is no statistical difference in the primary market returns for REIT versus
non-REIT IPOs after controlling for partial adjustment, size, and risk. However,
even after controlling for issuance and market characteristics, REIT IPOs
significantly underperform non-REIT IPOs in open-to-close and hour-to-close
returns. Moreover, consistent with the results presented in Exhibit 4, a few REITspecific variables appear to influence the level of relative REIT underpricing
(UPREIT, SASM, and Single Property Type), offer-to-open (Single Property Type),
or open-to-close returns (UPREIT).37
To further investigate the difference in REIT IPOs and non-REIT IPOs,
particularly with respect to the marginal impact of the return determinants for
REITs versus non-REITs, we estimate the following interaction-based model:
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
5 0
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
Returnm,i 5 am,i 1 b1,m REITi 1 b2,m Partial Adjustmenti
1 b2b,m (REITi 3 Partial Adjustmenti )
1 b3a,m Sizei 1 b3b,m (REITi 3 Sizei )
1 b4a,m Integeri 1 b4b,m (REITi 3 Integeri )
1 b5a,m NASDAQi 1 b5b,m (REITi 3 NASDAQi )
1 b6a,m Reputationi 1 b6b,m (REITi 3 Reputationi )
1 b7a,m Lead Managersi
1 b7b,m (REITi 3 Lead Managersi )
1 b8a,m Betai 1 b8b,m (REITi 3 Betai )
1 b9a,m Volatilityi 1 b9b,m (REITi 3 Volatilityi )
1 «m,i .
(3a)
It should be noted that this model is the expansion of Equation (2a) through
addition of the interaction of the REITi binary variable with all independent
variables in an effort to determine the marginal impact of REITs with respect to
a particular variable of interest.38
Consistent with our previous results, as shown in Columns (1) and (2) of Panel
A of Exhibit 7, the binary variable identifying REITs is not statistically significant
for total underpricing and offer-to-open returns after considering the other factors
known to influence initial returns. In fact, volatility is the only factor where the
marginal effect for REIT IPOs is statistically different from that of non-REITs,
effectively nullifying the impact of volatility on REIT initial returns.39
Examining open-to-close and hour-to-close returns, the coefficients on the REIT
binary variable for both secondary market return measures are negative and
significant. Again, in comparison with the primary market returns, this indicates
that REIT IPOs behave in a similar manner to non-REIT IPOs in the primary
market, but they post significantly lower returns in the aftermarket after
considering other factors such as partial adjustment, size, risk, and exchange of
listing. Finally, although the intraday reversal observed in Exhibit 4 for REITs
was not present in the pooled results presented in Exhibit 6, the results presented
in Panel A of Exhibit 7 again show that hour-to-close returns are negatively related
to open-to-hour returns for REITs only.
E x h i b i t 7 u Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs
Variable
Total Underpricing (%)
Offer-to-Open (%)
Open-to-Close (%)
Hour-to-Close (%)
Estimate
P-value
Estimate
P-value
Estimate
P-value
Estimate
P-value
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Panel A: Interactions model—full sample without REIT-specific variables
140.167*
0.051
63.561
0.160
53.124**
0.023
32.843***
0.000
REIT (binary)
217.493
0.850
253.191
0.501
250.367**
0.022
232.319***
0.001
0.000
0.079**
0.031
0.019
0.346
Partial Adjustment (%)
0.470***
0.000
0.368***
0.701
20.027
0.882
20.072*
0.079
20.003
0.904
28.290**
0.047
24.734*
0.070
22.224*
0.068
21.709***
0.000
J R E R
u
3 7
0.760
21.694
0.708
2.159*
0.058
26.824*
0.061
23.909
0.162
22.601*
0.097
20.620
0.462
REIT 3 Integer
3.104
0.513
0.317
0.938
2.515
0.127
0.366
0.628
NASDAQ (binary)
3.272*
0.084
1.488
0.528
1.835*
0.055
0.552
0.421
21.589
0.789
21.979
0.709
23.724***
0.007
22.026**
0.032
1.468
0.274
0.020
20.819
0.231
20.210
0.636
REIT 3 Underwriter Reputation
20.237
0.897
20.831
0.580
0.740
0.285
0.050
0.911
Lead Managers (Ln(#))
20.932
0.834
24.221
0.292
2.949
0.135
1.247
0.219
REIT 3 Lead Managers
20.875
0.892
1.840
0.739
21.801
0.365
20.645
0.579
0.004
5.359***
0.001
20.709
0.363
0.574
0.266
REIT 3 Size
REIT 3 NASDAQ
Reputation (ordinal)
2.093**
1.799***
0.001
N o .
0.476
3.001
0.477
0.057
0.961
0.875
0.291
22.898**
0.029
22.068**
0.011
0.802
0.836
4.708**
0.043
227.464***
0.006
226.554***
0.002
0.251
0.948
REIT 3 Volatility
25.147*
0.058
5 1
3.068
Volatility (%)
u
REIT 3 Beta
I P O s
1 – 2 0 1 5
4.867***
R E I T
u
Beta (b)
E q u i t y
Vo l .
1.634
Integer (binary)
i n
20.075
Size (Ln($M))
R e t u r n s
REIT 3 Partial Adjustment
M a r k e t
Intercept
5 2
E x h i b i t 7 u (continued)
u
Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs
Open-to-Close (%)
Hour-to-Close (%)
Estimate
P-value
Estimate
P-value
Estimate
P-value
Estimate
P-value
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Open-to-Hour (%)
REIT 3 Open-to-Hour
Year Fixed Effects
Observations
Yes
Yes
244
0.122
0.135
20.281**
(0.042)
Yes
244
Yes
244
242
0.390
0.373
0.351
0.360
Adj. R2
0.307
0.287
0.263
0.265
Panel B: Interactions model—full sample with REIT-specific variables
135.253*
0.060
58.504
0.190
53.241**
0.024
32.757***
0.000
REIT (binary)
218.997
0.851
290.730
0.477
251.391**
0.022
232.171***
0.001
0.000
0.078**
0.035
0.019
0.355
Partial Adjustment (%)
0.490***
0.000
0.389***
20.180
0.300
20.073
0.627
20.074*
0.076
20.005
0.837
Size (Ln($M))
28.036**
0.048
24.458*
0.083
22.245*
0.068
21.716***
0.000
REIT 3 Size
20.613
0.914
23.905
0.427
2.154*
0.061
Integer (binary)
26.296*
0.084
23.277
0.229
22.670*
0.099
20.708
0.414
REIT 3 Integer
3.512
0.435
0.596
0.873
2.654
0.118
0.480
0.601
NASDAQ (binary)
2.399*
0.099
0.512
0.831
1.964**
0.046
0.658
0.350
0.475
28.182
0.120
24.062***
0.009
22.443**
0.024
REIT 3 NASDAQ
24.474
1.803***
0.001
S t e e l e
REIT 3 Partial Adjustment
a n d
Intercept
R o s k e l l e y,
R2
H i g h f i e l d ,
Offer-to-Open (%)
G o k k a y a ,
Variable
Total Underpricing (%)
E x h i b i t 7 u (continued)
Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs
Variable
REIT 3 Underwriter Reputation
Offer-to-Open (%)
Estimate
P-value
Estimate
P-value
Estimate
P-value
Estimate
P-value
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
1.203
0.378
1.800*
Open-to-Close (%)
0.056
Hour-to-Close (%)
20.785
0.253
20.186
0.678
0.898
20.358
0.822
0.741
0.287
0.045
0.921
21.888
0.664
25.120
0.186
3.018
0.134
1.135
0.194
REIT 3 Lead Managers
1.158
0.868
3.944
0.514
21.892
0.341
20.688
0.544
Beta (b)
4.906***
0.003
5.404***
0.000
20.718
0.363
0.560
0.283
1.430
0.696
20.272
0.821
21.087
0.200
0.004
0.919
0.814
REIT 3 Beta
1.156
0.757
Volatility (%)
30.321**
0.011
SASM (binary)
3 7
Wave (binary)
Single Property Type (binary)
240.213***
8.318**
6.546*
213.498
29.271**
0.003
239.220**
0.019
20.300
0.939
24.659*
0.057
0.024
7.402**
0.034
0.721
0.154
0.322
0.318
6.933*
0.052
20.649
0.465
20.712
0.292
214.801*
0.097
1.541
0.328
1.012
0.337
0.046
20.459
0.332
20.388
0.256
0.119
0.137
0.049
28.779**
2
244
Yes
244
Yes
242
0.439
0.438
0.357
0.364
0.350
0.349
0.255
0.259
0.048
5 3
Adj. R
244
Yes
u
1 – 2 0 1 5
R2
20.285**
Yes
I P O s
N o .
Observations
Year Fixed Effects
R E I T
u
0.098
0.155
Open-to-Hour (%)
REIT 3 Open-to-Hour
0.041
E q u i t y
Vo l .
UPREIT (binary)
4.900**
i n
u
REIT 3 Volatility
29.334***
R e t u r n s
J R E R
0.245
Lead Managers (Ln(#))
M a r k e t
Reputation (ordinal)
Total Underpricing (%)
5 4
u
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
Notes: This exhibit provides the multivariate statistics for the sample of 122 equity REIT IPOs and a matched sample of 122 non-REIT IPOs for the period
January 1, 1993, to December 31, 2007. The sample of equity REIT IPOs and matching non-REIT IPOs was obtained from Thomson Financial’s SDC
Platinum New Issues Database. Similar to Dolvin and Pyles (2009), REIT IPOs are matched with non-REIT IPOs with the most similar size (proceeds) within
530 days of REIT IPO issuance. Four of the original 126 REIT IPOs did not have a match with all variables available. One matching firm did not have
hourly price observations. Thus, both the REIT and the matching firm were dropped from the analysis when hourly prices were needed. The dependent
variables are Total Underpricing, Offer-to-Open, Open-to-Close, and Hour-to-Close. Total Underpricing is the percentage change between the offer price
and the closing price on the first day of trading. See the notes to Exhibits 1–3 and 5 for variable definitions. P-Values are calculated using White’s (1980)
heteroscedasticity-consistent standard errors (HCSEs) and are presented to the right of the coefficient estimate. IPO characteristics, offer prices, open prices,
hour prices, and close prices were obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected from Jay Ritter’s IPO
website.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
G o k k a y a ,
E x h i b i t 7 u (continued)
Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs
M a r k e t
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
5 5
To control for various REIT-specific characteristics, in Panel B of Exhibit 7 we
present results for the following model:
Returnm,i 5 am,i 1 b1,m REITi 1 b2,m Partial Adjustmenti
1 b2b,m (REITi 3 Partial Adjustmenti )
1 b3a,m Sizei 1 b3b,m (REITi 3 Sizei )
1 b4a,m Integeri 1 b4b,m (REITi 3 Integeri )
1 b5a,m NASDAQi 1 b5b,m (REITi 3 NASDAQi )
1 b6a,m Reputationi 1 b6b,m (REITi 3 Reputationi )
1 b7a,m Lead Managersi
1 b7b,m (REITi 3 Lead Managersi )
1 b8a,m Betai 1 b8b,m (REITi 3 Betai )
1 b9a,m Volatilityi 1 b9b,m (REITi 3 Volatilityi )
1 b10,m UPREITi 1 b11,m SASMi 1 b12,m Wavei
1 b12,m Single Property Typei 1 «m,i .
(3b)
This model is the same as Equation (3a) except for the inclusion of the REITspecific variables: UPREIT, SASM, Wave, and Single Property Type. Since the
REIT-specific variables are by definition interaction variables, the interaction terms
are unnecessary. The results in Panel B are qualitatively similar to those presented
in Panel A.
Additional Analysis: Price Support
As shown in Exhibit 4, open-to-hour returns are negatively correlated with hourto-close returns for REIT IPOs. Panels A and B of Exhibit 7 not only confirm
this finding, but they also indicate that there is no correlation between open-tohour and hour-to-close returns for non-REIT IPOs. Simply put, we find evidence
of an aftermarket reversal in REIT IPOs that is not present in the matched sample
of non-REIT IPOs.
As mentioned earlier, a possible explanation for this finding is price support, a
process where underwriters engage in pure stabilization, utilize aftermarket short
covering, or exercise penalty bids in the secondary market (Aggarwal, 2000).
Unfortunately, direct evidence of price support is not observable, particularly since
pure stabilization in the United States is avoided by underwriters due to SEC
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
5 6
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
regulations requiring that each bid be flagged (Aggarwal, 2000). However, Hanley,
Kumar, and Sequin (1993), Ruud (1993), and Aggarwal (2000) note that price
support through aftermarket short covering and penalty bids remains common due
to the underwriter’s ability to remain anonymous. As a result, IPOs with weak
initial returns will receive support through one of these two mechanisms,
effectively censoring the left tail of the return distribution.
Given that Aggarwal (2000) finds aftermarket short covering is typical in weaker
offerings where initial returns are low, we follow Bradley, Gonas, Highfield, and
Roskelley (2009) by identifying a subsample of both ‘‘hot’’ and ‘‘cold’’ equity
REIT IPOs. We reconstruct the analysis of Hour-to-Close in Exhibit 4 using only
the 29 ‘‘hot’’ equity REIT IPOs that are in the top quartile of offer-to-open returns.
Alternatively, we repeat this analysis for 54 ‘‘cold’’ equity REIT IPOs in the
bottom quartile of offer-to-open returns. We find that the coefficient for Offer-toHour is negatively related to Hour-to-Close returns for cold REIT IPOs, and this
result is significant at the 4% level.40 The same coefficient for the hot IPO
subsample is negative but insignificantly different from zero.41
Prabhala and Puri (1999) suggest that underwriter price support is more common
in larger and less risky IPOs. Given that our evidence indicates that REIT IPOs
are somewhat less risky and more transparent than non-REITs IPOs, we report
Hour-to-Close results in Panels A and B of Exhibit 7 using only the 29 hot equity
REIT IPOs that are in the top quartile of offer-to-open returns and their matched
non-REIT counterparts.42
In results, the coefficient for the interaction between REIT and Offer-to-Hour is
negatively related to Hour-to-Close for cold REIT IPOs. This result is significant
at the 8% level. The same coefficient for the hot REIT IPO subsample is positive
but insignificantly different from zero.43 These findings are consistent with the
proposition that the intraday price reversals observed for REIT IPOs may be
evidence of underwriter price support, perhaps due to aftermarket short covering
of larger and weaker issues (Aggarwal, 2000).
u
Conclusion
Using 126 equity REIT IPOs from the Thomson Financial SDC Platinum New
Issues Database (SDC) for the period January 1, 1993 to December 31, 2007, this
paper contributes to the literature on REIT IPOs in several ways. First, in an effort
to shed more light on the REIT IPO underwriting market, we focus on the
components of underpricing: primary and secondary returns. Unlike recent
evidence for non-REIT IPOs, about 97% of the initial return for an average REIT
IPO is consumed at the first trade, leaving virtually no opportunities for profit in
the secondary market.
Examining the cross-sectional determinants, we find that offer-to-open returns are
directly related to uncertainty and partial adjustment proxies, consistent with
M a r k e t
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
5 7
theories based on compensation to primary market participants for information
production and risk taking during the roadshow. Untabulated results also indicate
that offer-to-open returns are negatively related to the single property structure of
REITs, suggesting that homogeneity of assets at the time of IPO reduces
information asymmetries and leads to lower price uncertainty for the REIT IPOs.
While open-to-close returns vary by REIT property focus and operating structure,
the average secondary market return for equity REITs is not significantly different
from zero, implying that uncertainty regarding REIT IPOs is resolved in the
primary market. The results also show that the secondary market returns of REIT
IPOs exhibit a significant negative relation between open-to-hour and hour-toclose returns, an aftermarket reversal that is not present in non-REIT IPOs,
possibly due to price support by underwriters.
Comparing REIT IPOs with non-REIT IPOs, we find significantly lower secondary
market returns for REITs despite similar primary market returns. This finding is
robust to alternative model specifications. It is consistent with the finding by
Highfield, Steele, and Van Ness (2013) that price uncertainty for equity REIT
IPOs resolves more quickly than non-REIT IPOs, possibly due to greater relative
information transparency.
In addition to extending the literature related to REIT IPOs, this study also has
implications for practitioners and investors. First, the evidence presented here is
consistent with the notion that REIT IPOs are relatively more transparent than
similar non-REIT IPOs. While this may lead to easier valuations of firms, investors
seeking to participate in REIT IPOs should be aware that most of the initial day
return, on average, is consumed in the first trade, and aftermarket reversals not
present in non-REIT IPOs may occur. Second, since REIT IPOs appear to pose
fewer information asymmetries than non-REITs, less information production will
be required of underwriters. Thus, REIT firms may be able to negotiate lower
gross spreads than similar non-REITs (Highfield, Steele, and Van Ness, 2013).
Finally, from an academic perspective, the evidence presented here indicates that
REITs and non-REITs indeed behave differently at the IPO stage, underlining the
impact of business models as well as regulatory requirements on the information
production associated with the IPO process.
u
Endnotes
1
2
Barry and Jennings (1993) note that, while the size of the return is statistically
significant, 60 bps would not cover typical transaction costs, particularly in light of the
magnitude of brokerage fees during the early 1990s. Bradley, Gonas, Highfield, and
Roskelley (2009) document that, on average, investors that purchase shares at the start
of trading return 2.3% over the day, enough to cover typical trading costs.
Chapter 9 of Chan, Erickson, and Wang (2003) provides a thorough background on pre2000 REIT security issuance and many of the differences between REITs and non-REITs
in terms of security offerings.
J R E R
u
Vo l .
3 7
u
N o .
1 – 2 0 1 5
5 8
3
4
5
6
7
8
9
10
11
12
13
14
u
G o k k a y a ,
H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
The authors appreciate two anonymous reviewers for assisting with the arguments and
rewording of this section. Damodaran and Liu (1993) find that REIT managers often
hire external appraisers to value properties held by the REIT, but this introduces
questions about the ability of insiders to value their own assets, a concept at odds with
the transparency reasoning presented here.
While utilizing REITs in an IPO study helps mitigate concerns regarding unobserved
heterogeneity, endogeneity problems may still potentially impact the inferences and
interpretation of the results, particularly with respect to some general and even REITspecific variables (i.e., size of the offer, UPREIT status, etc.). Anglin, Edelstein, Gao,
and Tsang (2011) note that the legal and regulatory constraints on REITs are not
effective substitutes for good corporate governance. Tidwell, Ziobrowski, Gallimore, and
Ro (2013) note that REIT information transparency may be contingent on the positive
or negative nature of the information.
Our generalized definition of uncertainty includes both aggregate demand (price)
uncertainty (Lowry, Officer, and Schwert, 2010) and traditional information asymmetry,
as measured through beta, single property focus, and UPREIT status.
Dolvan and Pyles (2009) utilize a sample of 209 REITs: 158 equity REITs, 29 mortgage
REITs, and 12 hybrid REITs. The study presented here utilizes only equity REITs.
Two conditions are required for the hypothesis to hold. First, there must be uncertainty
as to the value of the firm. Second, there must be a market of potential investors
composed of both informed and uniformed investors. Ling and Ryngaert (1997) argue
that these conditions hold for their sample due to changes that took place in the REIT
industry during the early 1990s.
Chan, Wang, and Yang (2009) develop a model that explicitly seeks to address the
empirical finding of overpricing in early REIT IPOs and the lack of underpricing in
master limited partnership and mutual fund IPOs.
Wang, Chan, and Gao (1992) note that overpriced REITs are primarily purchased by
individual investors. This result would be consistent with the theoretical models of Rock
(1986) and Benveniste and Spindt (1989).
See Hardin, Hill, and Hopper (2009) for an empirical examination of the impact of
ownership and management structure on property level performance.
In an effort to limit concerns about risk of firm failure, mergers, or acquisitions soon
after security issuance, all firms in the sample are required to have CRSP returns for
three years following the IPO. This effectively extends the sample through December
2010. Furthermore, the IPO market in general was very soft in 2008 and 2009 due to
the financial crisis, and there were only 11 equity REIT IPOs during the 2007–2010
period (Bairagi and Dimovski, 2011, 2012).
Only two REITs in our sample were identified as ‘‘blank check REITs,’’ firms which
hold no real assets at the time of filing a prospectus: Beacon Properties Corporation and
Gladstone Commercial Corporation. These firms were not classified as single property
type REITs.
Open Price is the first transaction price on the first day of public trading on the opening
day, Hour Price is the transaction price posted closest to an hour after the firm began
public trading on the opening day, and Close Price is the transaction price posted closest
to the 4:00 P.M. market closing time.
In cases where an IPO has multiple underwriters, the highest Carter and Manaster (1990)
value is used as the proxy for underwriter reputation for the IPO.
M a r k e t
15
16
17
18
19
20
21
22
23
24
25
26
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
5 9
This finding is consistent with the 4.67% observed by Bairagi and Dimovski (2011) for
the 1996–2010 period. Statistical significance of the value is displayed in Exhibit 2.
The authors would like to thank Bradley, Gonas, Highfield, and Roskelley (2009) for
supplying their data on total underpricing and offer-to-open returns. A t-test of the
difference in means for the relative portion of total underpricing consumed in the primary
market for their sample and the present REIT sample was significant at the 5% level.
It should be noted that most IPOs do not open at the same time that the market opens.
In fact, Bradley, Gonas, Highfield, and Roskelley (2009) note that the early afternoon
is a popular time for IPO openings. Thus, the open prices and the hour prices noted in
this study would not typically correspond to 9:30 AM and 10:30 AM Eastern Time,
respectively.
For example, Bradley, Gonas, Highfield, and Roskelley (2009) find that underwriters set
the offer price, on average, 4.72% above the midpoint of the file range.
The CRSP value-weighted index was also used as a robustness check, and the results
were qualitatively similar.
While most non-REIT IPO researchers consider the venture capital backing of IPOs, we
do not consider this factor due to the trivial fraction of equity REIT IPOs with venture
capital participation.
The time distribution reported here is similar to that observed by Chan, Chen, and Wang
(2013) for U.S. REIT IPOs.
For example, a hotel REIT likely has a much higher turnover rate on space rented, due
to daily lease periods, as compared to a typical residential REIT with a six or twelve
month leasing period. High rates of lease turnover could increase information asymmetry
or cash flow risk. Similarly, REIT IPOs (proceeds) vary greatly by property type, further
introducing information asymmetry issues. For example, the average healthcare REIT
IPO in the sample raises only $97.645 million while the average office REIT IPO in
the sample raises $330.916 million.
Healthcare represents REITs whose real assets are based in the healthcare industry. Hotel
represents those firms with real assets in the hospitality and temporary lodging industries.
Industrial represents equity REITs assets in a broad range of capital-intensive industries
such as development laboratories, distribution facilities, and secure data centers. Office
represents those firms with real assets in office rentals. Residential represents equity
REITs with primary investments in multi-family residential units. Retail indicates equity
REITs investing in regional malls, shopping centers, and other retail properties. Finally,
Diversified/Specialized represents equity REITs with diverse real asset holdings and
specialty real asset properties such as self-storage rental properties, golf properties,
correctional facilities, movie theaters, and communication towers. As a robustness check,
we also utilized the 11-category CRSP/Ziman REIT classification matrix in an
unreported analysis. The results are qualitatively similar.
Striewe, Rottke, and Zietz (2013) examine the impact of advisor status on the leverage
of REITs. They find that externally-advised REITs hold less debt than their internallyadvised counterparts due to a relatively higher cost of debt.
As noted by Bradley, Gonas, Highfield, and Roskelley (2009), these average returns do
not sum because total underpricing is truly a geometric return, whereas the summary
statistics are arithmetic averages. That is, (1 1 total underpricing) 5 (1 1 offer-toopen) 3 (1 1 open-to-close).
We control for year fixed effects in all the models.
J R E R
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6 0
27
28
29
30
31
32
33
34
35
36
37
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H i g h f i e l d ,
R o s k e l l e y,
a n d
S t e e l e
Since younger firms might be more difficult to value and likely pose more information
asymmetries, as an additional robustness check we also included the age of the REIT
at the time of IPO issuance. Specifically, we obtain the founding date of each firm from
the final prospectuses (424 B4) filed with the Securities and Exchange Commission
(SEC). Age is measured as the natural logarithm of one plus the number of years since
the establishment of the IPO firm. The results are robust to the inclusion of the age
variable in the model. Given the lack of age data for three REIT observations, and given
a lack of confidence in the homogeneity of the age variable within the REIT sample
due to inconsistencies in the reporting of age on a prospectus, we elected to emphasize
the current findings by excluding the age variable from the revised manuscript. Results
are available upon request.
In cases where an IPO has multiple underwriters, the highest Carter and Manaster (1990)
value is used as the proxy for underwriter reputation for the IPO. As a robustness check,
we also used the average Carter and Manaster (1990), and the results, not reported, are
quantitatively and qualitatively similar.
The results presented here are qualitatively similar to the results obtained using both
pre- and post-issue volatility measures, CRSP REIT and CRSP value-weighted indices,
and different volatility calculation windows. The results are robust.
SEC filings were reviewed to classify REIT IPOs as having a single or multiple property
focus. That is, in the listing of assets at the time of the IPO as provided in the prospectus,
we coded each issue as one if all real assets were classified as the same property type
as the self-described property type focus of the REIT, zero otherwise. Only two IPOs
in our sample held no assets at the time of the filing of the prospectus. These blank
check REITs were coded as zero.
Ling and Ryngaert (1997) and Hartzell, Kallberg, and Liu (2008) show that leverage
can be important in explaining IPO initial returns. We re-run our regressions and include
each IPO’s debt-to-equity ratio based on the book value of debt and the market value
of equity based on the IPO offer price. We find no qualitative difference in results.
Additional variables included as robustness checks include Dolvin and Pyles (2009)
opportunity cost of issuance (OCI), the percentage of shares retained by insiders
(overhang), and An, Cook, and Zumpano’s (2011) transparency measure, defined as the
proportion of unexplained variation from the expanded market model regression. The
results are robust.
We repeated the analysis above by including the four REIT IPOs without a matching
non-REIT IPO. The results were robust, but all REIT-related coefficients were larger in
magnitude and level of significance.
One matching firm did not have hourly price observations; thus, both the REIT and the
matching firm were dropped from the analysis when hourly prices were needed. As a
result, hour-to-close regressions utilize the remaining 242 IPOs: 121 REIT IPOs and
121 corresponding non-REIT IPOs.
As in Equation (1), Open-to-Hour is included as an explanatory variable in all models
where the dependent variable is Hour-to-Close.
For Equations (2b) and (3b), these REIT-specific binary variables are coded as zero for
all non-REITs. We appreciate an anonymous reviewer’s suggestion of this approach and
request that the REIT-specific variables be added to the pooled analysis.
As a robustness check, we utilized the Fama-French 12 industry classification to control
for industry differences in the non-REIT sample. The results are qualitatively similar:
M a r k e t
38
39
40
41
42
43
u
R e t u r n s
i n
E q u i t y
R E I T
I P O s
u
6 1
the REIT binary variable remains negative and significant for the Open-to-Close and
Hour-to-Close models.
As in Equations (2a) and (2b), the model for Hour-to-Close includes Open-to-Hour as
an explanatory variable. Consistent with the remainder of Equations (3a) and (3b), we
also included the interaction of the REIT binary variable with Open-to-Hour in the Hourto-Close model.
A joint test of summation of coefficients on REIT and REIT 3 volatility is not
statistically different from zero. That is, volatility has a statistically positive impact on
the returns of non-REIT IPOs, but, consistent with Exhibit 4, volatility does not
statistically influence the returns on REIT IPOs. In fact, as shown by Exhibit 6, the
overall effect of the two samples hides the importance of volatility for non-REIT returns.
The abnormally large bottom quartile for REIT IPOs is due to the large number of
observations with an offer-to-open return at the mode of 0%.
To conserve space, these results are not reported but are available from the authors upon
request.
As noted earlier, the abnormally large bottom quartile for REIT IPOs is due to the large
number of observations with an offer-to-open return at the mode of 0%.
To conserve space, these results are not reported but are available from the authors upon
request.
References
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of Finance, 2000, 55:3, 1075–1103.
Aggarwal, R., L. Krigman, and K. Womack. Strategic IPO Underpricing, Information
Momentum, and Lockup Expiration Selling. Journal of Financial Economics, 2002, 66:1,
105–37.
Ambrose, B. and P. Linneman. REIT Organization Structure and Operating Characteristics.
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The authors thank Brent Ambrose, Dan Bradley, Chuck Beauchamp, Richard Buttimer,
Michelle Carty (copy editing), Jack Cooney, Ken Cyree, David Downs, John Gonas,
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Bill Hardin, David Harrison, Matt Hill, Sa-Aadu, Jarjisu, Patrick Lach, Gabriel Lee,
Seow Eng Ong, Sanjay Ramchander, Mike Siller, Marc Simpson, G. Stacy Sirmans,
Robert Van Ness, Ko Wang (the editor), four anonymous reviewers, and seminar
participants at Mississippi State University, the University of Southern Mississippi,
the 2006 Financial Management Association Annual Meeting, the 2007 Eastern
Finance Association Annual Meeting, the 2008 American Real Estate Society Annual
Meeting, the 2008 American Real Estate and Urban Economics Association Annual
Meeting, the 2009 American Real Estate Society Annual Meeting, and the 2013
American Real Estate Society Annual Meeting for helpful comments and suggestions.
We also thank Jay Ritter for providing SDC data corrections and underwriter
reputation rankings on his website at the University of Florida. Financial support and
research assistance for this project was provided by the Eller College of Management
at the University of Arizona and the Robert W. Warren Chair of Real Estate at
Mississippi State University. The authors are grateful that this project was recognized
at the 2009 American Real Estate Society Annual Meeting with a manuscript prize in
the Real Estate Investment Trusts category sponsored by the National Association of
Real Estate Investment Trusts (NAREIT). This manuscript has been presented under
three different titles.
Sinan Gokkaya, Ohio University, Athens, OH 45701 or [email protected].
Michael J. Highfield, Mississippi State University, Mississippi State, MS 39762-9580
or [email protected].
Kenneth D. Roskelley, Mississippi State University, Mississippi State, MS 39762-9580
or [email protected].
Dennis F. Steele, Jr., Southern Adventist University, Collegedale, TN 37315 or
[email protected].