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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 J R E R u Vo l . 3 7 u N o . 1 – 2 0 1 5 2 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 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. 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 2 5 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. J R E R u Vo l . 3 7 u N o . 1 – 2 0 1 5 2 6 u 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 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. 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 2 7 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 J R E R u Vo l . 3 7 u N o . 1 – 2 0 1 5 2 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 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. u 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 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 2 9 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 u Vo l . 3 7 u N o . 1 – 2 0 1 5 3 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 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., 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 3 1 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 J R E R u Vo l . 3 7 u N o . 1 – 2 0 1 5 3 2 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 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). u 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 R e t u r n s 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 R e t u r n s i n E q u i t y R E I T I P O s u 3 5 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 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 3 7 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 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 3 9 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 u Vo l . 3 7 u N o . 1 – 2 0 1 5 6 0 27 28 29 30 31 32 33 34 35 36 37 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 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 Aggarwal, R. 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White, H. A Heteroskedasticity-consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica, 1980, 48:4, 817–38. The authors thank Brent Ambrose, Dan Bradley, Chuck Beauchamp, Richard Buttimer, Michelle Carty (copy editing), Jack Cooney, Ken Cyree, David Downs, John Gonas, J R E R u Vo l . 3 7 u N o . 1 – 2 0 1 5 6 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 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].