an examination of primar y and secondar y market retur ns in …€¦ · an examination of primar y...

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A n E x a m i n a t i o n o f P r i m a r y a n d

S e c o n d a r y 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

A u t h o r s Sinan Gokkaya, Michael J . Highfield,

Kenneth Roskel ley, and Dennis F. Steele , Jr.

A b s t r a c t We examine primary and secondary market returns for real estateinvestment trust (REIT) initial public offerings (IPOs).Consistent with theories regarding compensation for informationproduction during the roadshow, we find offer-to-open returnsare directly related to partial adjustment and are significantlylower for REITs holding assets in a single property type.Matching REIT IPOs to comparable non-REIT IPOs, we alsofind evidence consistent with demand uncertainty. Specifically,after controlling for issue and firm characteristics, REITs postsignificantly lower secondary market returns despite similarprimary market returns. This indicates that demand uncertaintyresolves more quickly for REITs, possibly due to higher relativetransparency.

There have been a multitude of studies examining the initial market returns ofinitial public offerings (IPOs); however, as in Loughran and Ritter (2004), mostof 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 isconsumed on the opening transaction, leaving no exploitable secondary marketreturns for non-real estate investment trust (REIT) IPOs. More recently, Bradley,Cooney, Jordan, and Singh (2009) find statistically and economically significantopen-to-close returns for a more recent sample of non-REIT IPOs and show thatboth primary and secondary market returns are positively related to the degree ofinformation asymmetry associated with the IPOs.1

Unfortunately, as is common in the general IPO literature, all of the above papersexclude REIT IPOs from their studies. In fact, while there is a considerable

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 forREIT IPOs (Ling and Ryngaert, 1997; Buttimer, Hyland, and Sanders, 2005;Hartzell, Kallberg, and Liu, 2005; Chan, Chen, and Wang, 2013), no previousstudy dissects REIT IPO underpricing into its primary and secondary marketcomponents.2

Although one could argue that a better understanding of the equity REIT IPOunderwriting market is an important question in itself due to the size of REITs asan asset class (Capozza and Seguin, 2003), equity REITs should also serve as aunique laboratory for investigating the implications of theories for underpricingin the primary and secondary markets.

Given that information asymmetry is not directly observable, most non-REITempirical studies employ a wide range of proxies that are distinctly different andmight be contaminated by firm and industry-wide effects (Ljungqvist, 2006; Leeand Masulis, 2009). Consistently, Bradley, Gonas, Highfield, and Roskelley (2009)note that their information asymmetry variables may actually proxy for unmodeledfirm- and industry-specific characteristics.

Limiting a sample to equity REIT IPOs might mitigate the concerns aboutunobserved firm- and industry-specific heterogeneity due to the equity REITbusiness model and regulatory requirements. While equity REITs vary in propertyfocus, these minor differences in underlying asset structures are standardized andeasily classified. Furthermore, unlike technology companies, equity REITs investin tangible, income-generating assets, which are relatively easy to value. A REIT’sreal assets are typically listed in annual reports, in SEC filings, and often on firmwebsites. Furthermore, equity analysts typically develop estimates of asset valuesthrough standard conventions for occupancy and rental rates based on observablegeographic and other property information. That is, compared to most otherindustries, 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 RealEstate Investment Trust Tax Provision of 1960, which was revised down to 90%with the REIT Modernization Act of 1999, expected dividends are modestlypredictable. Although the REIT market is constantly changing, these factorsshould theoretically reduce the agency problem of asset substitution and weakenthe asymmetric information problem between investors and issuers.4

This paper contributes to the existing IPO literature in several ways. First, in aneffort to shed more light on the REIT IPO underwriting market, and in contrastto previous REIT IPO studies examining only underpricing, we focus on theprimary and secondary market components of underpricing. Examining primary(offer-to-open) market returns, the findings show that, on average, about 97% ofthe initial market return is consumed on the opening transaction for REIT IPOsbetween 1993 and 2007. As a result, we find that the average secondary market(open-to-close) return for equity REITs is not significantly different from zero.

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Thus, unlike recent evidence for non-REIT IPOs, the underpricing of REIT IPOsis, on average, consumed in the primary market, leaving no opportunities for profitin the secondary markets.

Second, investigating the cross-sectional determinants of underpricing in theprimary and secondary markets, we find that offer-to-open returns are directlyrelated to partial adjustment and demand uncertainty, but secondary market returnsare unrelated to these characteristics. The results also indicate that offer-to-openreturns are lower for REITs holding a portfolio of real estate assets in a singleproperty type at the time of issue, potentially due to fewer information asymmetryproblems, leading to lower price uncertainty for the REIT IPO. Overall, thesefindings are consistent with the theories based on compensation to primary marketparticipants for information production and risk taking during the roadshow.5

Third, we compare the primary and secondary market returns of equity REIT IPOswith traditional non-REIT IPOs in an effort to focus on the potential differencesin the relative transparency between the two types of issuers. Consistent withprevious studies, we find that total underpricing for REIT IPOs is significantlylower than that observed for comparable non-REIT IPOs. Simply breakingunderpricing into its primary components, offer-to-open and open-to-close returns,does not affect this result. However, after considering other factors known toinfluence initial returns, our multivariate analysis shows that, in contrast to ourexpectations, while primary market returns for REIT IPOs are not statisticallydifferent from non-REITs after controlling for factors known to influenceunderpricing, secondary market returns for REIT IPOs remain significantly lowerthan those observed for their non-REIT IPO counterparts.

This finding is robust to alternative model specifications and could imply thatprice uncertainty regarding the IPO resolves more quickly for REIT than non-REITs, an important issue because of the growing debate on the greatertransparency of REITs as an asset class (Feng, Ghosh, and Sirmans, 2007). Dolvinand Pyles (2009) find smaller underpricing and price revisions for REIT IPOs andattribute this finding to reduced information asymmetry.6 Thus, in line withLjungqvist (2006), when comparing REITs and non-REITs, the share price of atypical equity REIT should be more easily ascertained in both the primary andsecondary markets than the stock price of the average non-REIT, potentiallybecause of greater information transparency and the tangible nature of REIT assetholdings.

As a final component to our analysis, an examination of the secondary marketreturns of REIT IPOs reveals a negative relation between open-to-hour and hour-to-close returns, suggesting an aftermarket reversal that is not present in non-REITIPOs. 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 byunderwriters.


u L i t e r a t u r e R e v i e w

I P O U n d e r p r i c i n g

The apparent underpricing of common shares in IPOs is well documented inacademic literature. The evidence indicates that this anomaly has been fairlypersistent through time. For example, Loughran and Ritter (2002) find an averageoffer-to-close return of just over 14% for a sample of 3,025 firms for the period1990 to 1998, while Ljungqvist (2006) finds an average first day return of around19% since the 1960s. More recently, Bradley, Gonas, Highfield, and Roskelley(2009) find an average total underpricing of just under 31% for the 1993–2003period.

Many theorists and empiricists have long pondered why, on average, issuers andtheir underwriters leave so much money on the table for investors in IPOs.Numerous researchers have attempted to explain this well-documented finding. Asnoted by Chan, Wang, and Yang (2009), most work in this area has been basedon asymmetric information between (1) issuers and underwriters, (2) betweenissuers and investors, and (3) among underwriters, informed investors, anduninformed investors. Unfortunately, the IPO literature almost exclusively reportsthis topic in the context of underpricing, the percentage difference between theoffer price and first-day closing price. This is problematic because most theoreticalmodels used to explain this initial return typically build on asymmetricinformation, institutional structure, or behavioral arguments, which areconcentrated 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 oninformation generation during the bookbuilding process. This ‘‘partial adjustmentmodel’’ considers underpricing as compensation to investors for revealing to theunderwriter private information, namely their true demand for an issue.7 The ideais that the expected compensation to an investor who reveals honest informationabout his or her demand for an issue must be greater than that of revealingdishonest information, where the magnitude of compensation for informationgeneration 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 positiveinformation during the bookbuilding process, underwriters only partially adjust upthe final offer price, thus leading to an underpricing phenomenon. Therefore, inline with the information acquisition theory, the reward to primary marketinvestors for truthfully revealing their demand should be realized upon the firsttrade in the open market, leaving little to no subsequent average intraday returnsfor secondary market participants.


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The Secondary Market. While the partial adjustment model can be used to explainunderpricing in the context of the primary market, some IPO models are predictiveabout the behavior of allocated shares in the secondary market. In this study, wegroup research regarding the initial secondary market trading of an IPO into twobroad categories: price support and demand uncertainty.

Benveniste, Busaba, and Wilhelm (1996) argue that underwriters may choose toprice support IPOs to bond with uninformed secondary market investors. Thisprice support censors the left-tail of the price distribution, thus generating apositive secondary market return (Bradley, Gonas, Highfield, and Roskelley, 2009).

Alternatively, Lowry, Officer, and Schwert (2010) argue that a portion of IPOunderpricing in the primary market may be related to the uncertainty of themarket’s aggregate demand for an IPO’s shares. They document that the level ofIPO underpricing is associated with the volatility of IPO initial returns and tendsto be higher in firms that are more difficult to value. Consistent with thishypothesis, Bradley, Gonas, Highfield, and Roskelley (2009) document that, onaverage, investors that purchase shares at the start of trading return 2.3% over theday. They note that almost the entire abnormal secondary market return occurs inthe first 30 minutes of trading as the demand uncertainty for the IPO shares isresolved. They also document that IPOs that are more difficult to price tend tohave higher secondary market returns.

Since price support can obscure relations between IPO initial returns and firm andmarket characteristics by truncating initial returns at zero, Bradley, Gonas,Highfield, and Roskelley (2009) also report results for the top quartile of firmssorted by offer-to-open returns. They find that the relation between initialsecondary market returns and beta is stronger in this sample, making price supportan 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 1971–1988period.8 Below, Zaman, and McIntosh (1995) examine a similar time period andfind an insignificant 20.89% offer-to-close return for the 1972–1988 period. Theseresearchers found REIT IPOs were typically overpriced, but subsequent legislativeacts, including the Tax Reform Act of 1986 (TRA86), which allowed activemanagement under the self-advised, self-managed structure, directly changed theoperations and investment attractiveness of the REIT industry.

As noted by Ling and Ryngaert (1997), the TRA93 allowed for increasedinstitutional ownership in REITs, bringing on an intense period of growth in theREIT industry and creating a more diverse market of investors distributed among


a better mix of informed (institution) and uniformed (individual) investors.9 CitingRock’s (1986) winner’s curse hypothesis, Ling and Ryngaert (1997) observe asignificant 3.60% offer-to-close return for equity REIT IPOs during the 1991–1996 period. The next major change occurred through the REIT SimplificationAct of 1997 (RSA97), which allowed REITs to provide non-customary servicesto tenants without disqualifying REITs from their tax-exempt status. As suggestedby Buttimer, Hyland, and Sanders (2005), growth in the underlying real estateindustry and the passage of TRA93 and RSA97 led to increased REIT IPO activity(waves). They document significant initial returns of 5.39% for the 1993–1994REIT IPO wave and 3.58% for the 1997–1998 wave.

The REIT Modernization Act of 1999 (RMA99) allowed REITs to establishtaxable REIT subsidiaries (TRS) to provide services to REIT tenants and others,increasing efficiency and lowering expenses.10 The RMA99 also reduced theminimum distribution requirement from 95% to 90% of taxable income. Five yearslater, the REIT Improvement Act of 2004 (RIA04) eliminated the barrier to foreigninvestors buying publicly listed REIT stock. It allowed REITs facing possible lossof REIT status to either fix the mistake or pay a monetary penalty for violationsof REIT tax laws. Finally, the REIT Investment Diversification and EmpowermentAct of 2007 (RIDEA) provides for more efficient asset management and increasedthe allowed size of taxable REIT subsidiaries.

Using IPO data from the ‘‘modern era,’’ Chan, Chen, and Wang (2013) investigatethe initial and long-run returns of 129 U.S. REITs and 241 international REITsfor the 1996–2010 period. They find a significant 2.78% raw initial return fortheir sample of U.S. REITs, and a larger 3.48% raw initial return for internationalREITs. Similarly, Bairagi and Dimovski (2011) find a 2.43% initial return for the2002–2006 period. They also find an insignificant overpricing of 1.19% for the2007–2010 period. Again, none of the REIT IPO studies discussed above segmenttotal underpricing into primary and secondary market components.

u H y p o t h e s e s a n d D a t a

D a t a S o u r c e s

We collect a sample of 126 equity REIT IPOs from the Thomson FinancialSecurities Data Company (SDC) New Issues Database for the January 1, 1993 toDecember 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 characteristicsare obtained from the SDC database and verified by hand using SEC filings. TheSNL Financial REIT Datasource (SNL) is used to identify UPREITS, as well asREIT property focus. Self-advised and self-managed REITs are identified inAmbrose and Linneman (2001) for REIT IPOs prior to 1997, and SEC filings areused for IPOs that take place after 1997. We also utilize SEC filings to determineif issuing firms are ‘‘Blank Check REITs’’ or hold assets in a single property typeat the time of issue.12


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Open, close, and intraday hourly prices are obtained from the NYSE Trade andQuote (TAQ) Database.13 Consistent with other IPO research, we use the Centerfor 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. TheCRSP value-weighted index is also utilized to obtain the pre-issue standarddeviation of the value-weighed CRSP REIT Index. We also obtain Carter andManaster (1990) underwriter reputation rankings from Jay Ritter at the Universityof Florida.14

S u m m a r y S t a t i s t i c s

We utilize the pricing variables obtained from SDC and TAQ to compute five IPOreturn measures: total underpricing, offer-to-open, open-to-close, open-to-hour,and hour-to-close. Total Underpricing is the percentage change between the offerprice and the close price on the first day of the IPO issue. While the mean andmedian price changes are relatively minor when compared to the 30.8% offer-to-close return observed by Bradley, Gonas, Highfield, and Roskelley (2009), theaverage underpricing for our sample is a statistically and economically significant5.23%.15 We next dissect total underpricing into a primary and secondary marketcomponent by utilizing the open price on the secondary market. Representing thereturn in the primary market, the Offer-to-Open is the percentage change betweenthe offer price and the open price. We find an economically and statisticallysignificant 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 muchsmaller in absolute magnitude, the relative proportion of underpricing dedicatedto the primary market for equity REITs (5.09 4 5.23 5 0.973) is statisticallylarger than that noted by Bradley, Gonas, Highfield, and Roskelley (2009) for non-REIT firms (27.5 4 30.8 5 0.893).16

Representing the secondary market return, Open-to-Close is the percentage changebetween the open price and the close price on the first day of trading. Unlike thestatistically significant 2.3% documented by Bradley, Gonas, Highfield, andRoskelley (2009), the open-to-close returns observed for equity REIT IPOs arenot significantly different from zero. On average, an investor who purchases anequity REIT IPO in the secondary market should expect no abnormal return overthe first trading day; however, examining the variations in open-to-close returnsfor 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 thesource of this variation in open-to-close returns in addition to primary marketreturns, not to document that equity REIT secondary market returns are greaterthan 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 percentagechange between the open price and the transaction price observed closest to onehour after the firm opens for trading on an exchange, and its compliment, Hour-


to-Close, the percentage change between the transaction price closest to one hourafter the open of a firm’s stock on an exchange to the close price on the first dayof trading.17 As one would expect, these values are relatively small, with medianvalues of zero, but the range remains relatively large.

Descriptive statistics for other conditioning variables previously shown toinfluence 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 garneringonly $10.8 million. The average percentage difference between the offer price andthe mid-point of the original file range, Partial Adjustment, is 23.59%, indicatingthat firm underwriters, on average, set the offer price 3.59% below the mid-pointof the file range set in the initial prospectus. Again, there is a large amount ofvariation in the sample with respect to partial adjustment, but the average observedhere 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 betacoefficient 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 rateto estimate the mean coefficient of the daily market risk premium.19 The resultingex post beta coefficient (Beta) serves as a proxy for the price uncertainty of theIPO 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 ofuncertainty in the market, Lowery and Shu (2002), Bradley, Gonas, Highfield, andRoskelley (2009), and Chen, Fok, and Kang (2010) suggest that underpricing isincreasing in market volatility. Thus, similar to Chen, Fok, and Kang (2010), wecompute the daily standard deviation of the CRSP/Ziman REIT Index over the125 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 equityREITs is listed on the NASDAQ (NASDAQ), and approximately 61% of oursample is priced on an integer (Offer Integer), a finding consistent with most otherIPO studies.20 It also appears that REITs typically retain highly active underwritersas documented by an average underwriter reputation ranking of 8.08 on the Carterand Manaster (1990) scale for the highest rated lead underwriter in theunderwriting syndicate. Lead Managers is the number of lead underwriters listedon the IPO prospectus. We find that no issuer claimed more than three leadmanagers, while most IPOs had only one.

Turning to organizational structure, 84.1% are structured as an umbrellapartnership REIT (UPREIT) at the time of offering, while 78.6% of the REITs inthe sample are classified as self-advised and self-managed (SASM) at the time oftheir IPO. We also find that 71.6% of the firms held real assets of a single propertytype, which is also consistent with the self-reported property focus on theprospectus. The remaining 28.4% held multiple types of real estate assets (i.e.,


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Exhibi 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 0.602 0.244 0.403 1.889

NASDAQ (binary) 0.071 — — 0.000 1.000

Offer Integer (binary) 0.611 — — 0.000 1.000

Reputation (ordinal) 8.087 8.000 1.374 2.000 9.000

Lead Managers (cardinal) 1.189 1.000 0.450 1.000 3.000

SASM (binary) 0.786 — — 0.000 1.000

UPREIT (binary) 0.841 — — 0.000 1.000

Single Property Type (binary) 0.716 1.000 — 0.000 1.000

Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC PlatinumNew Issues Database for the period January 1, 1993 to December 31, 2007. The number ofobservations is 126. Offer Price is the price per share offered to primary investors. Open Price isthe price per share at the open of the secondary market the day of the REIT IPO. Close Price is theprice per share closest to 4:00 P.M. on the first day of trade in the secondary market. TotalUnderpricing is the percentage change between the offer price and the closing price on the firstday of trading. Offer-to-Open is the percentage change from the offer price to the open price inthe secondary market on the first day of trading. Open-to-Close is the percentage change in theopen price to the close price in the secondary market on the first day of trade. Open-to-Hour isthe percentage change from the offer price to the market price closest to one hour after the IPOopens for public trading in the secondary market. Hour-to-Close is the percentage change in themarket price closest to one hour after the IPO opens for public trading in the secondary market tothe close price in the secondary market on the first day of trade. Size is the natural logarithm ofProceeds (millions) generated from the sale of securities in the IPO. File Range represents thedifference in the high and low prices in the prospectus file range divided by the midpoint of thatfile range. Partial Adjustment is the percentage change from the middle of the original file rangeto the offer price. Beta is the mean coefficient of the daily market risk premium as estimated on


Exhibi t 1 u (continued)

Descriptive Statistics

the daily excess return for the first six months of trading, where the market rate of return isproxied 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 125trading days prior to the IPO [2125, 21] multiplied by 100 to represent a percentage. NASDAQis binary variable with a value equaling one if the firm was initially listed on the NASDAQ, zerootherwise. 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 underwritersof the issue. Lead Managers is the number of lead managers in the underwriting syndicate. SASMis a binary variable equal to one if the REIT is listed as both self-advised and self-managed on theS-3 filing, zero otherwise. UPREIT is a binary variable equal to one if the REIT is listed as anUPREIT on the S-3 filing, zero otherwise. Single Property Type is a binary variable equal to one ifall properties owned by a REIT at the time of the IPO are in a single property classification, zerootherwise. IPO characteristics, offer prices, open prices, hour prices, and close prices wereobtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collectedfrom Jay Ritter’s IPO website.

diversified REITs), held real estate assets inconsistent with the stated propertyfocus on the prospectus, or had no real assets at the time of issuance (i.e., ‘‘blankcheck’’ REITs).

u M e t h o d s a n d R e s u l t s

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 T S a m p l e

We begin our analysis of equity REITs by performing a series of univariate sortsto 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 totalunderpricing, as well as an offer-to-open return for the average REIT IPO. UnlikeBradley, Gonas, Highfield, and Roskelley’s (2009) findings for non-REIT IPOs,we find that an average secondary market participant purchasing a REIT IPOimmediately after the opening earns no statistically significant return over the firsttrading day for any year in the sample period.

Panel B of Exhibit 2 reports average IPO underpricing during the REIT IPO wavesdocumented by Buttimer, Hyland, and Sanders (2005) and Chan, Chen, and Wang(2013) during our sample period. We also report average underpricing for theIPOs issued during non-wave periods. In all windows considered, the totalunderpricing consists primarily of the offer-to-open return. Although the meanvalue is large, like Buttimer, Hyland, and Sanders (2005), we find no statistical


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Exhibi t 2 u Univariate Analysis: Sorts by Time

NTotalUnderpricing

Offer-to-OpenReturn

Open-to-CloseReturn

Hour-to-CloseReturn

Panel A: Returns by year

1993 37 6.240* 6.048* 0.133 0.131

1994 35 3.204*** 3.099*** 0.123 0.149

1995 3 33.830 33.306 0.353 0.006

1996 5 4.271 4.750 20.449 20.458*

1997 14 6.908*** 6.477*** 0.360 0.009

1998 5 4.337 5.361 20.971 20.373

1999 1 4.167 0.00 4.167 2.041

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

2007 1 8.143 9.524 21.261 2.366

Full sample of REIT IPOs 126 5.234*** 5.093*** 0.122 0.080

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

Non-Wave Years 13 11.449 11.283 0.143 0.201


Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC PlatinumNew Issues Database for the period January 1, 1993 to December 31, 2007. Total Underpricingis 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 secondarymarket on the first day of trading. Open-to-Close is the percentage change in the open price tothe close price in the secondary market on the first day of trade. Hour-to-Close is the percentagechange in the market price closest to one hour after the IPO opens for public trading in thesecondary market to the close price in the secondary market on the first day of trade. Panel Apresents 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 fromSDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collected from JayRitter’s IPO website.*Significant at the 10% level.**Significant at the 5% level.***Significant at the 1% level.


evidence that REIT IPOs are underpriced when REIT IPO issuance is low (non-wave years).

To further document any potential variation in our sample of equity REITs, inExhibit 3 we report total underpricing, offer-to-open, open-to-close, and hour-to-close returns based on several firm- and issue-specific characteristics. As noted byGokkaya, Hill, and Kelly (2013), it is possible that the level of informationasymmetry or cash flow risk embedded in an equity REIT is a function of itsproperty focus.22 As a result, in Panel A of Exhibit 3 we segment the REITs intoseven property focus categories.23 With the exception of the Healthcare andDiversified/Specialized property types, all property groups post significant,positive total underpricing and offer-to-open returns. We find no evidence ofsignificant secondary market returns for any property class with the exception ofthe 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 44.6bps, while Diversified/Specialized REITs have a statistically significant hour-to-close loss of 42.0 bps.

Classifying the REIT IPOs based on the property structure, Panel B of Exhibit 3shows that REIT IPOs with a single property focus are associated with the lowertotal underpricing relative to REITs IPOs investing in multiple property types.Breaking down the total underpricing into its major components, our results showthat this result is driven by the primary returns and is unrelated to secondarymarket returns.

Panel C of Exhibit 3 presents REITs based on their UPREIT classification. Asnoted by Dolvin and Pyles (2009), the implementation of the UPREIT structurein equity REITs may impact REIT IPO issuance costs and underpricing. Astructure first utilized by the Taubman Centers IPO in 1992, UPREITs are createdwhen one or more individuals provide the REIT with property holdings inexchange for limited partnership interests, or operating units. While not recognizedformally as equity in the partnership, these operating units can be converted toshares 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 umbrellapartnerships. Chen and Lu (2006) find similar results for IPOs. These findingssupport Ling and Ryngaert’s (1997) suggestion that the complexity of the UPREITstructure increases the price uncertainty of the firm. Consistent with these studies,we also find that UPREITs are significantly underpriced relative to ordinaryREITs. As one would expect, most of this underpricing comes in the form ofcompensation 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 bythe REIT. These externally advised and externally managed REITs were


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

Exhibi t 3 u Univariate Analysis: Sorts on Issue Characteristics

NTotalUnderpricing

Offer-to-OpenReturn

Open-to-CloseReturn

Hour-to-CloseReturn

Panel A: Returns by REIT property focus

Healthcare 6 1.314 0.659 0.643 0.146

Hotel 11 5.268* 4.099 1.179 0.442

Industrial 9 3.638** 4.213* 20.506 20.144

Office 23 10.527** 9.995** 0.454 0.159

Residential 24 2.491*** 1.948*** 0.521* 0.446*

Retail 31 2.791*** 3.037*** 20.255 0.015

Diversified/Specialized 22 7.839 8.361 20.545 20.420*


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


Panel C: Returns by UPREIT classification

A) UPREITs 106 5.988*** 5.739*** 0.227 0.144

B) Non-UPREITs 20 1.235 1.670** 20.440 20.258

Difference (A–B) 126 4.753** 4.069* 0.667 0.402


Panel D: Returns by advisement/management combination (SASM)

A) SASM 108 5.493*** 5.296*** 0.170 0.116

B) Not SASM 18 3.679* 3.871*** 20.168 20.135

Difference (A–B) 126 1.814 1.425 0.338 0.251


Panel E: REIT IPOs based on exchange of listing

A) NYSE/AMEX 117 5.220*** 4.906*** 0.289* 0.189

B) NASDAQ 9 5.409 7.517** 22.050** 21.341**

Difference (A–B) 126 20.189 22.610 22.338*** 1.530***




Univariate Analysis: Sorts on Issue Characteristics

NTotalUnderpricing

Offer-to-OpenReturn

Open-to-CloseReturn

Hour-to-CloseReturn

Panel F: Returns by offer price relative to initial file range

A) Above File Range 12 16.667** 15.780** 0.682 0.916

B) Within File Range 68 6.269*** 6.148*** 0.117 20.010

C) Below File Range 46 0.721** 0.745*** 20.018 20.006

Difference (A–B) 80 10.397* 9.632* 0.565 0.926*

Difference (B2C) 114 5.548** 3.968** 0.135 20.004

Difference (A–C) 58 15.944*** 15.035*** 0.700 0.922**


Notes: The sample includes 126 equity REIT IPOs obtained from Thomson Financial’s SDC PlatinumNew Issues Database for the period January 1, 1993 to December 31, 2007. Total Underpricingis 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 secondarymarket on the first day of trading. Open-to-Close is the percentage change in the open price tothe close price in the secondary market on the first day of trade. Hour-to-Close is the percentagechange in the market price closest to one hour after the IPO opens for public trading in thesecondary 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 relatedto healthcare, hospitality, industrial, office rentals, multi-family rental units, regional malls, andshopping centers, respectively. Diversified/Specialized represents equity REITs with assets relatedto diversified real asset holdings, self-storage properties, and specialty properties, such ascorrectional facilities. Above File Range represents firms whose offer prices were above theoriginal file range. Within File Range represents firms whose offer price was within the originalfile range, and Below File Range represents those firms whose offer prices were below the initialfile range. IPO characteristics, offer prices, open prices, hour prices, and close prices wereobtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputation rankings were collectedfrom 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, manyREITs brought both the advisement and management functions in house tobecome self-advised/self-managed (SASM) REITs. Building on Capozza andSequin (2000), Chen and Lu (2006) find lower IPO gross spreads for SASMREITs, suggesting that SASM REITs are informationally more transparent thannon-SASM REITs. Alternatively, as shown in Panel D of Exhibit 3, we find thattotal underpricing and offer-to-open returns are larger for SASM REITs as


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

compared to non-SASM REITs, but the difference between the two groups is notstatistically significant.24

Turning to more traditional IPO underpricing variables, as shown in Panel E ofExhibit 3, the vast majority of REITs are listed on the NYSE/AMEX. Althoughnot explicitly noted in previous REIT IPO studies, this finding is consistent withREIT SEO studies such as Friday, Howton, and Howton (2000). There is nostatistical difference between NYSE/AMEX and NASDAQ issues in terms of totalunderpricing and offer-to-open returns, but ‘‘big board’’ REIT IPOs generate apositive and significant open-to-close return of 28 bps. On the other hand, theNASDAQ-listed REIT IPOs post an economically and statistically significant22.05% (21.34%) open-to-close (hour-to-close) return. Both secondary marketreturn 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 andthe 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 positivelycorrelated to underpricing in the primary market. Consistent with her model, REITIPO firms whose underwriters set the offer price above the original file range posta significant 16.7% total underpricing. This value declines monotonically as theoffer price is placed within the original file range and then below it. Primarymarket returns virtually mirror the underpricing returns, and the differences inaverage underpricing and offer-to-open return between file range groups arestatistically significant. Revisions to the file range also seem to be positivelycorrelated to average open-to-close and hour-to-close returns, but the relation isnot statistically significant. However, in examining intraday returns, we find thatissues priced above the file range generate hour-to-close returns about 92 bpshigher than those issues priced within or below the file range.

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 T S a m p l e

Bradley, Gonas, Highfield, and Roskelley (2009) document that, on average,primary market investors who purchase a non-REIT IPO at the offer price earnan offer-to-close return of 30.78% over the first trading day. Segmenting this totalunderpricing, they find that the primary market investor who sold at the openearned an average return of 27.50%, leaving only 2.35%, on average, to theaftermarket investor who bought at the open and sold at the close on the first dayof trading.25

Consistent with the findings of Lowry, Officer, and Schwert (2010) on totalunderpricing, Bradley, Gonas, Highfield, and Roskelley (2009) show that moredifficult to price IPOs experience larger returns on the first day of trading. Theyrelate this relatively larger open-to-close return to the aggregate demanduncertainty for the IPO shares that specialists and dealers face as the IPO opensfor trading. They also show that aggregate market volatility (market uncertainty),


beta (information asymmetries), and firm size (firm risk) influence both theprimary and secondary market returns for non-REIT IPOs. They argue that thesevariables proxy for the difficulty in pricing a firm. However, they caution that betamay actually proxy for unmodeled heterogeneity and not information asymmetriesfor non-REIT IPOs. Therefore, we construct the following multivariate regressionmodel to estimate the determinants of total underpricing and its componentreturns:

Return 5 a 1 b Partial Adjustment 1 b Sizem,i m,i 1,m i 2,m i

1 b Integer 1 b NASDAQ3,m 4,m i

1 b Reputation 1 b Lead Managers5,m i 6,m i

1 b Beta 1 b Volatility7,m i 8,m i

1 b UPREIT 1 b SASM9,m i 10,m i

1 b Wave 1 b Single Property Type11,m i 12,m i

1 b Heathcare 1 b Hotel13,m i 14,m i

1 b Industrial 1 b Office15,m i 16,m i

1 b Residential 1 b Retail 1 « , (1)17,m i 18,m i m,i

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, Offer-

to-Open, Open-to-Close, or Hour-to-Close. Turning to the independent variables,Bradley, Gonas, Highfield, and Roskelley (2009) show that the percentagedifference 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, afinding documented for total underpricing by Hanley (1993) as based on the workof 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 logarithmproceeds (millions) generated from the sale of securities in the IPO, is includedto proxy for smaller firms that are theoretically more difficult to price due togreater information asymmetry.27 Given that Bradley, Cooney, Jordan, and Singh(2004) find that IPOs priced on an integer have greater underpricing, presumablydue to uncertainty about the value of the firm and negotiations between theunderwriter and issuer, we include Integer, a binary variable equal to one if theoffer price is an integer, zero otherwise. Since the NASDAQ and NYSE havedifferent IPO opening trade mechanisms and listing requirements, we include


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

NASDAQ, a binary variable with a value equal to one if the firm was initiallylisted on the NASDAQ, zero otherwise.

Loughran and Ritter (2004) find that underwriters with more experience andgreater reputation are more likely to underprice IPOs; thus, as a control, weinclude the variable Reputation, the Carter and Manaster (1990) measure of leadunderwriter quality represented on an ordinal scale from one (lowest) to nine(highest) for the year the REIT went public.28 Recognizing that multipleunderwriters may generate more information during the due diligence process, wealso include the natural logarithm of the number of lead underwriters of the issue,Lead Managers. Next, Bradley, Gonas, Highfield, and Roskelley (2009) suggestthat the ex post beta coefficient proxies for the price uncertainty of the IPO. Asa result, we include Beta, the mean coefficient of the daily market risk premiumas estimated on the daily excess return for the first six months of trading. Themarket rate of return is proxied by the CRSP REIT index, and the risk-free returnis proxied by the six month (26 week) T-bill rate.

If Bradley, Gonas, Highfield, and Roskelley’s (2009) results for Beta do notrepresent asymmetric information but instead reflect unmodeled firmheterogeneity, as they caution, then reducing the heterogeneity in the sample mighteliminate the relations they document. Their warning is particularly resonant giventhey do not control for industry effects. We suggest that limiting our sample toequity REITs might reduce the impact of unobserved firm and industry-wideheterogeneity on inferences.

Lowery and Shu (2002), Bradley, Gonas, Highfield, and Roskelley (2009), andChen, Fok, and Kang (2010) suggest that underpricing is increasing in marketvolatility. Thus, similar to Chen, Fok, and Kang (2010), we include Volatility, thedaily standard deviation of the CRSP REIT Index over the 125 trading days priorto the IPO [–125, –1] multiplied by 100 to represent a percentage.29

While restricting attention to equity REITs will reduce variation in the level ofasymmetric information and unmodeled firm heterogeneity as compared to atypical sample of non-REIT IPOs, the variation is not fully eliminated. Forinstance, Ghosh, Nag, and Sirmans (2000) and Dolvin and Pyles (2009), amongothers, have shown that REIT organizational structure impacts security issuance.To address these and other industry-specific concerns, we include a series of binaryvariables.

UPREIT is a binary variable equal to one for UPREITs, zero otherwise, whichcontrols for the unique tax advantages and added financing flexibility enjoyed byUPREITs (see Hartzell et al., 2008). Since Chen and Lu (2006) and Ambrose andLinneman (2001) note that the management structure may be related to agencyproblems which may impact security issuance, we also include the binary variableSASM, 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


Hartzell, Kallberg, and Liu (2005), we include a binary variable, Wave, to identifyIPOs that take place in wave periods of 1993–1994 and 1997–1998, as well asIPOs taking place in 2004–2005.

Recognizing that REIT IPOs holding assets in a single property subtype at thetime 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 onGokkaya, Hill, and Kelly (2013), who suggest that the riskiness of REIT cashflows and associated potential adverse selection problems may be a function ofthe type of underlying real assets held by the firm, we include controls fordifferences across property focus types. Specifically, Residential, Retail,Industrial, Office, Healthcare, and Hotel denote the respective conventional REITproperty focus variables. The binary variable Diversified/Specialized, whichequals one for specialized or diversified REITs, zero otherwise, is the omittedreference group in our multivariate models.

Finally, it is possible that large price changes in the first hour of secondary markettrading may indicate greater aggregate demand uncertainty due to, among otherthings, 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 closestto one hour after the IPO opens for public trading in the secondary market, whenestimating the determinants of hour-to-close returns.

Exhibit 4 provides the multivariate analysis for the first day returns of our sampleof REIT IPOs. Consistent with the general IPO literature, we find that thepercentage difference in the offer price, the mid-point of the IPO file range (PartialAdjustment), and risk (Beta) are positively correlated with underpricing and offer-to-open, or primary market, returns. While the underpricing and primary marketeffects for these variables are economically significant, unlike Bradley, Gonas,Highfield, and Roskelley’s (2009) examination of the non-REIT market, neitherof these variables provide explanatory power to the average open-to-close or hour-to-close returns in the REIT IPOs secondary-market.31 Consistent with the notionthat smaller firms pose greater information asymmetries, the coefficient on Size isalso negatively related to underpricing and offer-to-open returns but not related toeither aftermarket return measure. In general, all of these findings are consistentwith the information acquisition model of Benveniste and Spindt (1989) and showthat primary market participants are rewarded for their information productionduring the registration process.

Other results from Exhibit 4 also deserve attention. First, NASDAQ REITs postoffer-to-open returns approximately 7.30% higher than that of NYSE/AMEXreturns after controlling for other characteristics of the IPO. This coefficient thenreverses to a significant 21.90% for open-to-close returns. While the positiveoffer-to-open return is much larger than that observed in Bradley, Gonas,Highfield, and Roskelley (2009), the negative open-to-close return is consistentwith what they observed for the 1999–2000 period.

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Exhibi t 4 u Multivariate Analysis of First Day Returns for REITs

Variable

Total Underpricing (%)

Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

Intercept 151.193 0.116 152.450 0.108 21.586 0.857 22.229 0.765

Partial Adjustment (%) 0.344*** 0.006 0.319*** 0.008 0.023 0.207 0.020 0.224

Size (Ln($M)) 28.247* 0.099 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

NASDAQ (binary) 5.274 0.275 7.293* 0.099 21.997* 0.051 21.683** 0.017

Reputation (ordinal) 1.994 0.194 1.927 0.199 0.045 0.740 20.058 0.605

Lead Managers (Ln(#)) 23.975 0.485 24.506 0.423 0.576 0.502 0.566 0.533

Beta (b) 6.273 * 0.054 6.714** 0.050 20.456 0.652 20.216 0.777

Volatility (%) 0.865 0.938 1.717 0.867 0.564 0.817 0.313 0.860

UPREIT (binary) 6.378* 0.090 5.961* 0.100 0.386 0.382 0.168 0.617

SASM (binary) 12.258* 0.062 10.389 0.109 1.761* 0.054 0.260 0.697

Wave (binary) 212.146 0.404 214.519 0.299 2.010 0.412 20.889 0.658

Single Property Type (binary) 29.286* 0.067 28.696* 0.079 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 20.364 0.584 0.105 0.837

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Multivariate Analysis of First Day Returns for REITs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

Office (binary) 20.607 0.938 20.842 0.913 0.273 0.609 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

Open-to-Hour (%) 20.246* 0.052

Year Fixed Effects Yes Yes Yes Yes

R2 0.369 0.367 0.320 0.281

Adj. R2 0.178 0.176 0.115 0.054

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 TotalUnderpricing, 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-consistentstandard errors (HCSEs) and are presented to the right of the coefficient estimate. IPO characteristics, offer prices, open prices, hour prices, and close priceswere 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 V o l . 3 7 u N o . 1 – 2 0 1 5

Second, as to REIT-specific heterogeneity, it appears that both the UPREIT andSASM management structures play a statistically marginal but economically largerole in total underpricing. Decomposing this finding in the offer-to-open and open-to-close models yields additional results. The UPREIT structure is positivelyrelated to offer-to-open returns, a finding consistent with Han’s (2006) suggestionthat UPREIT investors face increased information asymmetries that accompanythe partnership structure, but are not related to open-to-close or hour-to-closereturns. On the other hand, open-to-close returns are positively correlated withSASM status but unrelated to offer-to-open returns. While organizational structurecould play a role in information asymmetry at the time of issue, leading to priceuncertainty consistent with the results presented, evidence by Capozza and Seguin(2000) shows that internally advised REITs consistently outperform externallyadvised REITs.

Third, turning to an additional measure of REIT information transparency, theanalysis reveals that offer-to-open returns are lower for REITs holding only assetsconsistent 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 firmassets at the time of IPO reduces information asymmetries and leads to lowerprice uncertainty for the IPO. Once again, and consistent with theories based oncompensation to primary market participants, open-to-close returns are unrelatedto the property focus of the REIT IPOs.

Finally, in the last column of Exhibit 4, we present a model of the determinantsof hour-to-close returns. We include the open-to-hour return in this model toidentify intraday reversals. As shown, we indeed find evidence of a weak reversalduring the trading day, a finding that may be evidence of price support by leadunderwriters. 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 andits return components solely in the context of REITs, we now turn our attentionto a comparison of REIT IPOs and their non-REIT counterparts. Similar to Dolvinand Pyles (2009), we match our sample of REIT IPOs with non-REIT IPOs basedon similar size (proceeds) within 530 days of the REIT IPO issuance. Four ofthe 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 non-REIT IPOs.34

Exhibit 5 presents the difference in means for our sample of equity REIT IPOsand the matched sample of non-REIT IPOs for all variables of interest. Given thatthe matching methodology was based on size (Proceeds), we find no significant


Exhibi t 5 u Difference in Means Analysis: Equity REIT IPOs vs. Matched Non-REIT IPOs

VariableEquity REIT IPOs(A)

Matched Non-REIT IPOs(B)

Difference(A–B)

Offer Price ($) 18.757 16.382 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

Total Underpricing (%) 5.260 14.564 29.304***

Offer-to-Open (%) 5.121 11.389 26.268***

Open-to-Close (%) 0.119 2.579 22.460***

Open-to-Hour (%) 0.039 0.057 20.018

Hour-to-Close (%) 0.083 1.685 21.602***

Partial Adjustment (%) 23.271 5.262 28.533***

Proceeds 201.316 192.102 9.214

Size (Ln($M)) 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 IPOsand 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 ThomsonFinancial’s SDC Platinum New Issues Database. Similar to Dolvin and Pyles (2009), REIT IPOs arematched with non-REIT IPOs with the most similar size (proceeds) within 530 days of REIT IPOissuance. 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 matchingfirm were dropped from the analysis when hourly prices were needed. For REITs, Beta is the meancoefficient of the daily market risk premium as estimated on the daily excess return for the first sixmonths 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. For non-REITs, Beta is computedusing the CRSP value-weighted index as the proxy for the market rate of return. See the notes toExhibits 1–3 for other variable definitions. Carter-Manaster reputation rankings were collectedfrom Jay Ritter’s IPO website. The difference between equity REITs and the matched sample isevaluated using a simple t-test.*Significant at the 10% level.**Significant at the 5% level.***Significant at the 1% level.


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

difference in the samples for the variables Proceeds and Log Size. Along with theintraday variables of Hour Price and Close Price, the size-related variables arethe only descriptive variables for the REIT IPO sample that do not post astatistically different mean than the matched non-REIT IPO sample.

Turning to our variables of interest, we find that REIT IPOs post an average totalunderpricing 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, forREITs versus non-REITs. After noting the significantly lower underpricing andoffer-to-open returns for REITs, we find that the percentage adjustment in theoffer 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 informationproduction 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 ina pooled multivariate framework. We begin by estimating the following baselinemodel:

Return 5 a 1 b REIT 1 b Partial Adjustmentm,i m,i 1,m i 2,m i

1 b Size 1 b Integer 1 b NASDAQ3,m i 4,m i 5,m i


1 b Beta 1 b Volatility 1 « . (2a)8,m i 9,m i m,i

REITi is a binary variable equal to one for REIT IPOs, zero otherwise.35 Thisequation is qualitatively similar to Equation (1) with the exception of the additionof the REIT variable and the elimination of REIT-specific control variables, suchas UPREIT, SASM, Wave, Single Property Type, and the property focus binaryvariables.

As shown in Column (1) in Panel A of Exhibit 6, after controlling for the variousfactors shown previously to influence total underpricing in non-REIT IPO studies,the level of underpricing for REIT IPOs is not statistically different from that ofnon-REITs. That is, the 930 bps difference in underpricing between REITs andnon-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

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Exhibi t 6 u Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Panel A: Base model—full sample without REIT-specific variables

Intercept 129.152** 0.021 87.589** 0.044 27.814** 0.028 16.264*** 0.007

REIT (binary) 20.761 0.774 21.425 0.520 22.231*** 0.002 21.049*** 0.004

Partial Adjustment (%) 0.456*** 0.000 0.383*** 0.000 0.063** 0.014 0.027* 0.065

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 1.543* 0.088 0.633 0.238

Reputation (ordinal) 1.834* 0.081 1.855** 0.033 20.174 0.600 0.013 0.942

Lead Managers (Ln(#)) 22.481 0.484 24.130 0.256 1.673 0.251 0.448 0.562

Beta (b) 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 1.748 0.254

Open-to-Hour (%) 0.114 0.135


Observations 244 244 244 242

R2 0.372 0.349 0.263 0.266

Adj. R2 0.312 0.287 0.193 0.192

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Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Panel B: Base model—full sample with REIT-specific variables

Intercept 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

Partial Adjustment (%) 0.451*** 0.000 0.373*** 0.000 0.059** 0.025 0.025* 0.094

Size (Ln($M)) 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

NASDAQ (binary) 4.073* 0.095 2.180 0.284 1.706* 0.056 0.712 0.181

Reputation (ordinal) 1.832* 0.084 1.850** 0.038 20.168 0.616 0.022 0.908

Lead Managers (Ln(#)) 22.417 0.534 23.915 0.391 1.564 0.294 0.379 0.643

Beta (b) 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

UPREIT (binary) 5.782* 0.081 4.400 0.150 1.310* 0.069 0.451 0.271

SASM (binary) 7.018* 0.076 5.374 0.119 1.149 0.269 0.456 0.547

Wave (binary) 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

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Baseline Model of First Day Returns for REIT IPOs and Matched Sample of Non-REIT IPOs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Open-to-Hour (%) 0.109 0.151



R2 0.410 0.389 0.273 0.274

Adj. R2 0.341 0.319 0.189 0.186

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 periodJanuary 1, 1993 to December 31, 2007. The sample of equity REIT IPOs and matching non-REIT IPOs was obtained from Thomson Financial’s SDC PlatinumNew Issues Database. Similar to Dolvin and Pyles (2009) REIT IPOs are matched with non-REIT IPOs with the most similar size (proceeds) within 1/230days 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 hourlyprice observations; thus, both the REIT and the matching firm were dropped from the analysis when hourly prices were needed. The dependent variables areTotal 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 fixedeffects (not reported to conserve space) in all models. P-Values are calculated using White’s (1980) heteroscedasticity-consistent standard errors (HCSEs). IPOcharacteristics, offer prices, open prices, hour prices, and close prices were obtained from SDC Platinum, CRSP, and TAQ. Carter-Manaster reputationrankings 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 V o l . 3 7 u N o . 1 – 2 0 1 5

Exhibit 5 showing that REITs post average open-to-close returns are 627 bps lowerthan non-REITs is effectively explained by the other dependent variables, mostnotably partial adjustment, size, integer, underwriter reputation, and risk (Beta).

While the primary market returns for both non-REIT and REIT IPOs arestatistically similar, open-to-close and hour-to-close returns exhibit a differentstory. After controlling for IPO issuance and market characteristics, we find thatREIT IPOs are associated with significantly lower secondary market returnscompared to non-REIT IPOs. The results show that REIT IPOs post open-to-closeand hour-to-close returns that are, on average, 223 bps and 105 bps lower thannon-REIT IPOs, respectively. This finding is statistically significant andeconomically large. The remaining variables are consistent in sign and significancewith Bradley, Gonas, Highfield, and Roskelley (2009).

To control for various REIT-specific characteristics, in Panel B of Exhibit 6 wepresent the results of the following model:


1 b Size 1 b Integer 1 b NASDAQ3,m i 4,m i 5,m i


1 b Beta 1 b Volatility 1 b UPREIT8,m i 9,m i 10,m i

1 b SASM 1 b Wave11,m i 12,m i

1 b Single Property Type 1 « . (2b)12,m i m,i

This equation is the same as Equation (2a) except for the inclusion of the REIT-specific 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 versusnon-REIT IPOs after controlling for partial adjustment, size, and risk. However,even after controlling for issuance and market characteristics, REIT IPOssignificantly underperform non-REIT IPOs in open-to-close and hour-to-closereturns. Moreover, consistent with the results presented in Exhibit 4, a few REIT-specific 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 forREITs versus non-REITs, we estimate the following interaction-based model:



1 b (REIT 3 Partial Adjustment )2b,m i i

1 b Size 1 b (REIT 3 Size )3a,m i 3b,m i i

1 b Integer 1 b (REIT 3 Integer )4a,m i 4b,m i i

1 b NASDAQ 1 b (REIT 3 NASDAQ )5a,m i 5b,m i i

1 b Reputation 1 b (REIT 3 Reputation )6a,m i 6b,m i i

1 b Lead Managers7a,m i

1 b (REIT 3 Lead Managers )7b,m i i

1 b Beta 1 b (REIT 3 Beta )8a,m i 8b,m i i

1 b Volatility 1 b (REIT 3 Volatility )9a,m i 9b,m i i

1 « . (3a)m,i

It should be noted that this model is the expansion of Equation (2a) throughaddition of the interaction of the REITi binary variable with all independentvariables in an effort to determine the marginal impact of REITs with respect toa particular variable of interest.38

Consistent with our previous results, as shown in Columns (1) and (2) of PanelA of Exhibit 7, the binary variable identifying REITs is not statistically significantfor total underpricing and offer-to-open returns after considering the other factorsknown to influence initial returns. In fact, volatility is the only factor where themarginal 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 REITbinary variable for both secondary market return measures are negative andsignificant. Again, in comparison with the primary market returns, this indicatesthat REIT IPOs behave in a similar manner to non-REIT IPOs in the primarymarket, but they post significantly lower returns in the aftermarket afterconsidering other factors such as partial adjustment, size, risk, and exchange oflisting. Finally, although the intraday reversal observed in Exhibit 4 for REITswas not present in the pooled results presented in Exhibit 6, the results presentedin Panel A of Exhibit 7 again show that hour-to-close returns are negatively relatedto open-to-hour returns for REITs only.

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Exhibi t 7 u Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Panel A: Interactions model—full sample without REIT-specific variables

Intercept 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

Partial Adjustment (%) 0.470*** 0.000 0.368*** 0.000 0.079** 0.031 0.019 0.346

REIT 3 Partial Adjustment 20.075 0.701 20.027 0.882 20.072* 0.079 20.003 0.904

Size (Ln($M)) 28.290** 0.047 24.734* 0.070 22.224* 0.068 21.709*** 0.000

REIT 3 Size 1.634 0.760 21.694 0.708 2.159* 0.058 1.799*** 0.001

Integer (binary) 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

REIT 3 NASDAQ 21.589 0.789 21.979 0.709 23.724*** 0.007 22.026** 0.032

Reputation (ordinal) 1.468 0.274 2.093** 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

Beta (b) 4.867*** 0.004 5.359*** 0.001 20.709 0.363 0.574 0.266

REIT 3 Beta 3.068 0.476 3.001 0.477 0.057 0.961 0.875 0.291

Volatility (%) 22.898** 0.029 22.068** 0.011 0.802 0.836 4.708** 0.043

REIT 3 Volatility 227.464*** 0.006 226.554*** 0.002 0.251 0.948 25.147* 0.058

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Interactions Model of First Day Returns for REITs and Matched Sample of Non-REIT IPOs

Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Open-to-Hour (%) 0.122 0.135

REIT 3 Open-to-Hour 20.281** (0.042)



R2 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

Intercept 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

Partial Adjustment (%) 0.490*** 0.000 0.389*** 0.000 0.078** 0.035 0.019 0.355

REIT 3 Partial Adjustment 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 1.803*** 0.001

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

REIT 3 NASDAQ 24.474 0.475 28.182 0.120 24.062*** 0.009 22.443** 0.024

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Variable


Estimate P-value

Offer-to-Open (%)

Estimate P-value

Open-to-Close (%)

Estimate P-value

Hour-to-Close (%)

Estimate P-value

(1) (2) (3) (4) (5) (6) (7) (8)

Reputation (ordinal) 1.203 0.378 1.800* 0.056 20.785 0.253 20.186 0.678

REIT 3 Underwriter Reputation 0.245 0.898 20.358 0.822 0.741 0.287 0.045 0.921

Lead Managers (Ln(#)) 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

REIT 3 Beta 1.156 0.757 1.430 0.696 20.272 0.821 21.087 0.200

Volatility (%) 30.321** 0.011 29.334*** 0.004 0.919 0.814 4.900** 0.041

REIT 3 Volatility 240.213*** 0.003 239.220** 0.019 20.300 0.939 24.659* 0.057

UPREIT (binary) 8.318** 0.024 7.402** 0.034 0.721 0.154 0.322 0.318

SASM (binary) 6.546* 0.098 6.933* 0.052 20.649 0.465 20.712 0.292

Wave (binary) 213.498 0.155 214.801* 0.097 1.541 0.328 1.012 0.337

Single Property Type (binary) 29.271** 0.049 28.779** 0.046 20.459 0.332 20.388 0.256

Open-to-Hour (%) 0.119 0.137

REIT 3 Open-to-Hour 20.285** 0.048



R2 0.439 0.438 0.357 0.364

Adj. R2 0.350 0.349 0.255 0.259

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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 periodJanuary 1, 1993, to December 31, 2007. The sample of equity REIT IPOs and matching non-REIT IPOs was obtained from Thomson Financial’s SDCPlatinum New Issues Database. Similar to Dolvin and Pyles (2009), REIT IPOs are matched with non-REIT IPOs with the most similar size (proceeds) within530 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 havehourly price observations. Thus, both the REIT and the matching firm were dropped from the analysis when hourly prices were needed. The dependentvariables are Total Underpricing, Offer-to-Open, Open-to-Close, and Hour-to-Close. Total Underpricing is the percentage change between the offer priceand 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 IPOwebsite.*Significant at the 10% level.**Significant at the 5% level.***Significant at the 1% level.


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

To control for various REIT-specific characteristics, in Panel B of Exhibit 7 wepresent results for the following model:


1 b (REIT 3 Partial Adjustment )2b,m i i

1 b Size 1 b (REIT 3 Size )3a,m i 3b,m i i

1 b Integer 1 b (REIT 3 Integer )4a,m i 4b,m i i

1 b NASDAQ 1 b (REIT 3 NASDAQ )5a,m i 5b,m i i

1 b Reputation 1 b (REIT 3 Reputation )6a,m i 6b,m i i

1 b Lead Managers7a,m i

1 b (REIT 3 Lead Managers )7b,m i i

1 b Beta 1 b (REIT 3 Beta )8a,m i 8b,m i i

1 b Volatility 1 b (REIT 3 Volatility )9a,m i 9b,m i i

1 b UPREIT 1 b SASM 1 b Wave10,m i 11,m i 12,m i

1 b Single Property Type 1 « .12,m i m,i (3b)

This model is the same as Equation (3a) except for the inclusion of the REIT-specific variables: UPREIT, SASM, Wave, and Single Property Type. Since theREIT-specific variables are by definition interaction variables, the interaction termsare unnecessary. The results in Panel B are qualitatively similar to those presentedin Panel A.

A d d i t i o n a l A n a l y s i s : P r i c e S u p p o r t

As shown in Exhibit 4, open-to-hour returns are negatively correlated with hour-to-close returns for REIT IPOs. Panels A and B of Exhibit 7 not only confirmthis finding, but they also indicate that there is no correlation between open-to-hour and hour-to-close returns for non-REIT IPOs. Simply put, we find evidenceof an aftermarket reversal in REIT IPOs that is not present in the matched sampleof non-REIT IPOs.

As mentioned earlier, a possible explanation for this finding is price support, aprocess where underwriters engage in pure stabilization, utilize aftermarket shortcovering, or exercise penalty bids in the secondary market (Aggarwal, 2000).Unfortunately, direct evidence of price support is not observable, particularly sincepure stabilization in the United States is avoided by underwriters due to SEC


regulations requiring that each bid be flagged (Aggarwal, 2000). However, Hanley,Kumar, and Sequin (1993), Ruud (1993), and Aggarwal (2000) note that pricesupport through aftermarket short covering and penalty bids remains common dueto the underwriter’s ability to remain anonymous. As a result, IPOs with weakinitial 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 weakerofferings where initial returns are low, we follow Bradley, Gonas, Highfield, andRoskelley (2009) by identifying a subsample of both ‘‘hot’’ and ‘‘cold’’ equityREIT IPOs. We reconstruct the analysis of Hour-to-Close in Exhibit 4 using onlythe 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 thebottom quartile of offer-to-open returns. We find that the coefficient for Offer-to-

Hour is negatively related to Hour-to-Close returns for cold REIT IPOs, and thisresult is significant at the 4% level.40 The same coefficient for the hot IPOsubsample is negative but insignificantly different from zero.41

Prabhala and Puri (1999) suggest that underwriter price support is more commonin larger and less risky IPOs. Given that our evidence indicates that REIT IPOsare somewhat less risky and more transparent than non-REITs IPOs, we reportHour-to-Close results in Panels A and B of Exhibit 7 using only the 29 hot equityREIT IPOs that are in the top quartile of offer-to-open returns and their matchednon-REIT counterparts.42

In results, the coefficient for the interaction between REIT and Offer-to-Hour isnegatively related to Hour-to-Close for cold REIT IPOs. This result is significantat the 8% level. The same coefficient for the hot REIT IPO subsample is positivebut insignificantly different from zero.43 These findings are consistent with theproposition that the intraday price reversals observed for REIT IPOs may beevidence of underwriter price support, perhaps due to aftermarket short coveringof larger and weaker issues (Aggarwal, 2000).

u C o n c l u s i o n

Using 126 equity REIT IPOs from the Thomson Financial SDC Platinum NewIssues Database (SDC) for the period January 1, 1993 to December 31, 2007, thispaper contributes to the literature on REIT IPOs in several ways. First, in an effortto shed more light on the REIT IPO underwriting market, we focus on thecomponents of underpricing: primary and secondary returns. Unlike recentevidence for non-REIT IPOs, about 97% of the initial return for an average REITIPO is consumed at the first trade, leaving virtually no opportunities for profit inthe secondary market.

Examining the cross-sectional determinants, we find that offer-to-open returns aredirectly related to uncertainty and partial adjustment proxies, consistent with


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

theories based on compensation to primary market participants for informationproduction and risk taking during the roadshow. Untabulated results also indicatethat offer-to-open returns are negatively related to the single property structure ofREITs, suggesting that homogeneity of assets at the time of IPO reducesinformation 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 differentfrom zero, implying that uncertainty regarding REIT IPOs is resolved in theprimary market. The results also show that the secondary market returns of REITIPOs exhibit a significant negative relation between open-to-hour and hour-to-close 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 secondarymarket returns for REITs despite similar primary market returns. This finding isrobust to alternative model specifications. It is consistent with the finding byHighfield, Steele, and Van Ness (2013) that price uncertainty for equity REITIPOs resolves more quickly than non-REIT IPOs, possibly due to greater relativeinformation transparency.

In addition to extending the literature related to REIT IPOs, this study also hasimplications for practitioners and investors. First, the evidence presented here isconsistent with the notion that REIT IPOs are relatively more transparent thansimilar non-REIT IPOs. While this may lead to easier valuations of firms, investorsseeking to participate in REIT IPOs should be aware that most of the initial dayreturn, on average, is consumed in the first trade, and aftermarket reversals notpresent in non-REIT IPOs may occur. Second, since REIT IPOs appear to posefewer information asymmetries than non-REITs, less information production willbe required of underwriters. Thus, REIT firms may be able to negotiate lowergross spreads than similar non-REITs (Highfield, Steele, and Van Ness, 2013).Finally, from an academic perspective, the evidence presented here indicates thatREITs and non-REITs indeed behave differently at the IPO stage, underlining theimpact of business models as well as regulatory requirements on the informationproduction associated with the IPO process.

u E n d n o t e s1 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 themagnitude of brokerage fees during the early 1990s. Bradley, Gonas, Highfield, andRoskelley (2009) document that, on average, investors that purchase shares at the startof trading return 2.3% over the day, enough to cover typical trading costs.

2 Chapter 9 of Chan, Erickson, and Wang (2003) provides a thorough background on pre-2000 REIT security issuance and many of the differences between REITs and non-REITsin terms of security offerings.


3 The authors appreciate two anonymous reviewers for assisting with the arguments andrewording of this section. Damodaran and Liu (1993) find that REIT managers oftenhire external appraisers to value properties held by the REIT, but this introducesquestions about the ability of insiders to value their own assets, a concept at odds withthe transparency reasoning presented here.

4 While utilizing REITs in an IPO study helps mitigate concerns regarding unobservedheterogeneity, endogeneity problems may still potentially impact the inferences andinterpretation of the results, particularly with respect to some general and even REIT-specific 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 noteffective substitutes for good corporate governance. Tidwell, Ziobrowski, Gallimore, andRo (2013) note that REIT information transparency may be contingent on the positiveor negative nature of the information.

5 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.

6 Dolvan and Pyles (2009) utilize a sample of 209 REITs: 158 equity REITs, 29 mortgageREITs, and 12 hybrid REITs. The study presented here utilizes only equity REITs.

7 Two conditions are required for the hypothesis to hold. First, there must be uncertaintyas to the value of the firm. Second, there must be a market of potential investorscomposed of both informed and uniformed investors. Ling and Ryngaert (1997) arguethat these conditions hold for their sample due to changes that took place in the REITindustry during the early 1990s.

8 Chan, Wang, and Yang (2009) develop a model that explicitly seeks to address theempirical finding of overpricing in early REIT IPOs and the lack of underpricing inmaster limited partnership and mutual fund IPOs.

9 Wang, Chan, and Gao (1992) note that overpriced REITs are primarily purchased byindividual investors. This result would be consistent with the theoretical models of Rock(1986) and Benveniste and Spindt (1989).

10 See Hardin, Hill, and Hopper (2009) for an empirical examination of the impact ofownership and management structure on property level performance.

11 In an effort to limit concerns about risk of firm failure, mergers, or acquisitions soonafter security issuance, all firms in the sample are required to have CRSP returns forthree years following the IPO. This effectively extends the sample through December2010. Furthermore, the IPO market in general was very soft in 2008 and 2009 due tothe financial crisis, and there were only 11 equity REIT IPOs during the 2007–2010period (Bairagi and Dimovski, 2011, 2012).

12 Only two REITs in our sample were identified as ‘‘blank check REITs,’’ firms whichhold no real assets at the time of filing a prospectus: Beacon Properties Corporation andGladstone Commercial Corporation. These firms were not classified as single propertytype REITs.

13 Open Price is the first transaction price on the first day of public trading on the openingday, Hour Price is the transaction price posted closest to an hour after the firm beganpublic trading on the opening day, and Close Price is the transaction price posted closestto the 4:00 P.M. market closing time.

14 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.


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

15 This finding is consistent with the 4.67% observed by Bairagi and Dimovski (2011) forthe 1996–2010 period. Statistical significance of the value is displayed in Exhibit 2.

16 The authors would like to thank Bradley, Gonas, Highfield, and Roskelley (2009) forsupplying their data on total underpricing and offer-to-open returns. A t-test of thedifference in means for the relative portion of total underpricing consumed in the primarymarket for their sample and the present REIT sample was significant at the 5% level.

17 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 afternoonis a popular time for IPO openings. Thus, the open prices and the hour prices noted inthis study would not typically correspond to 9:30 AM and 10:30 AM Eastern Time,respectively.

18 For example, Bradley, Gonas, Highfield, and Roskelley (2009) find that underwriters setthe offer price, on average, 4.72% above the midpoint of the file range.

19 The CRSP value-weighted index was also used as a robustness check, and the resultswere qualitatively similar.

20 While most non-REIT IPO researchers consider the venture capital backing of IPOs, wedo not consider this factor due to the trivial fraction of equity REIT IPOs with venturecapital participation.

21 The time distribution reported here is similar to that observed by Chan, Chen, and Wang(2013) for U.S. REIT IPOs.

22 For example, a hotel REIT likely has a much higher turnover rate on space rented, dueto daily lease periods, as compared to a typical residential REIT with a six or twelvemonth leasing period. High rates of lease turnover could increase information asymmetryor cash flow risk. Similarly, REIT IPOs (proceeds) vary greatly by property type, furtherintroducing information asymmetry issues. For example, the average healthcare REITIPO in the sample raises only $97.645 million while the average office REIT IPO inthe sample raises $330.916 million.

23 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 industriessuch as development laboratories, distribution facilities, and secure data centers. Office

represents those firms with real assets in office rentals. Residential represents equityREITs with primary investments in multi-family residential units. Retail indicates equityREITs investing in regional malls, shopping centers, and other retail properties. Finally,Diversified/Specialized represents equity REITs with diverse real asset holdings andspecialty 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 anunreported analysis. The results are qualitatively similar.

24 Striewe, Rottke, and Zietz (2013) examine the impact of advisor status on the leverageof REITs. They find that externally-advised REITs hold less debt than their internally-advised counterparts due to a relatively higher cost of debt.

25 As noted by Bradley, Gonas, Highfield, and Roskelley (2009), these average returns donot sum because total underpricing is truly a geometric return, whereas the summarystatistics are arithmetic averages. That is, (1 1 total underpricing) 5 (1 1 offer-to-open) 3 (1 1 open-to-close).

26 We control for year fixed effects in all the models.


27 Since younger firms might be more difficult to value and likely pose more informationasymmetries, as an additional robustness check we also included the age of the REITat the time of IPO issuance. Specifically, we obtain the founding date of each firm fromthe 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 sincethe establishment of the IPO firm. The results are robust to the inclusion of the agevariable in the model. Given the lack of age data for three REIT observations, and givena lack of confidence in the homogeneity of the age variable within the REIT sampledue to inconsistencies in the reporting of age on a prospectus, we elected to emphasizethe current findings by excluding the age variable from the revised manuscript. Resultsare available upon request.

28 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, arequantitatively and qualitatively similar.

29 The results presented here are qualitatively similar to the results obtained using bothpre- and post-issue volatility measures, CRSP REIT and CRSP value-weighted indices,and different volatility calculation windows. The results are robust.

30 SEC filings were reviewed to classify REIT IPOs as having a single or multiple propertyfocus. 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 typeas the self-described property type focus of the REIT, zero otherwise. Only two IPOsin our sample held no assets at the time of the filing of the prospectus. These blankcheck REITs were coded as zero.

31 Ling and Ryngaert (1997) and Hartzell, Kallberg, and Liu (2008) show that leveragecan be important in explaining IPO initial returns. We re-run our regressions and includeeach IPO’s debt-to-equity ratio based on the book value of debt and the market valueof equity based on the IPO offer price. We find no qualitative difference in results.

32 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 theproportion of unexplained variation from the expanded market model regression. Theresults are robust.

33 We repeated the analysis above by including the four REIT IPOs without a matchingnon-REIT IPO. The results were robust, but all REIT-related coefficients were larger inmagnitude and level of significance.

34 One matching firm did not have hourly price observations; thus, both the REIT and thematching firm were dropped from the analysis when hourly prices were needed. As aresult, hour-to-close regressions utilize the remaining 242 IPOs: 121 REIT IPOs and121 corresponding non-REIT IPOs.

35 As in Equation (1), Open-to-Hour is included as an explanatory variable in all modelswhere the dependent variable is Hour-to-Close.

36 For Equations (2b) and (3b), these REIT-specific binary variables are coded as zero forall non-REITs. We appreciate an anonymous reviewer’s suggestion of this approach andrequest that the REIT-specific variables be added to the pooled analysis.

37 As a robustness check, we utilized the Fama-French 12 industry classification to controlfor industry differences in the non-REIT sample. The results are qualitatively similar:


J R E R u V o l . 3 7 u N o . 1 – 2 0 1 5

the REIT binary variable remains negative and significant for the Open-to-Close andHour-to-Close models.

38 As in Equations (2a) and (2b), the model for Hour-to-Close includes Open-to-Hour asan explanatory variable. Consistent with the remainder of Equations (3a) and (3b), wealso included the interaction of the REIT binary variable with Open-to-Hour in the Hour-

to-Close model.39 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 onthe returns of non-REIT IPOs, but, consistent with Exhibit 4, volatility does notstatistically influence the returns on REIT IPOs. In fact, as shown by Exhibit 6, theoverall effect of the two samples hides the importance of volatility for non-REIT returns.

40 The abnormally large bottom quartile for REIT IPOs is due to the large number ofobservations with an offer-to-open return at the mode of 0%.

41 To conserve space, these results are not reported but are available from the authors uponrequest.

42 As noted earlier, the abnormally large bottom quartile for REIT IPOs is due to the largenumber of observations with an offer-to-open return at the mode of 0%.

43 To conserve space, these results are not reported but are available from the authors uponrequest.

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The authors thank Brent Ambrose, Dan Bradley, Chuck Beauchamp, Richard Buttimer,Michelle Carty (copy editing), Jack Cooney, Ken Cyree, David Downs, John Gonas,


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].

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