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Are REIT Investors Overly Optimistic after Equity Offerings?: Evidence from Analyst Forecast Errors

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Abstract

Optimism around Initial Public Offerings is well documented. However, Seasoned Equity Offerings are often surrounded by less optimism. Based on analyst forecast properties for a large number of REITs, we find that REIT analysts tend to be relatively optimistic after IPOs, whereas this tends not to be the case surrounding SEOs. Our results are more pronounced when REITs are bigger and have more analysts following them. Our results are robust for a number of multivariate specifications. Our findings suggest that possible underperformance of REITs after the IPO may be caused by over-optimistic investors.

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Notes

  1. See also Ghosh et al. (2013) who examine operating performance after REIT SEOs. For an investigation into IPO returns, worldwide, see Chan et al. (2013).

  2. Relatedly, in a recent paper Boudry et al. (2010) report evidence that REITs seem to make their capital structure decisions (i.e., issue equity, etc.) consistent with predictions that arise form market timing theory.

  3. There is a large literature that investigates bias in analyst recommendations (i.e., Dugar and Nathan (1995); Lin and McNichols (1998); Michaely and Womack (1999), and, more recently, Iskoz (2003), Malmendier and Shantikumar (2007), Agrawal and Chen (2008), and Kadan et al. (2009)) have demonstrated that analyst bias is at least partly driven by underwriting relationships.

  4. It is important to note that in this paper we are ambiguous on whether REITs under or over perform after IPOs and SEO. Rather, we only investigate whether the market is optimistic/pessimistic about the prospects of the REIT, which, in turn, has been hypothesized as a potential reason for underperformance.

  5. Our results do not change when we use the highest, lowest, or closing stock price of the year.

  6. Price provides the data from his website, http://www.mckayprice.com/research.html

  7. Because we are interested in forecast errors after REIT offerings, the dataset of REITs from CRSP/Compustat starts one year prior to the available REIT forecasts (from I/B/E/S).

  8. Note that we winsorize FE at 5% and 95% to minimize the effect of outliers.

  9. To check whether this is reasonable, we compare the CRSP begindate with the IPO date as reported on SDC (when available). For a random sample of 10 sample REITs, we find that in 9 cases the difference between the begindate and SDC IPO date is 0 or 1 day. In the remaining case, the difference is 10 days.

  10. When we use year dummies instead, our main results do not qualitatively change.

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Acknowledgements

The authors gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data available through the Institutional Brokers Estimate System. This data has been provided as part of a broad academic program to encourage earnings expectations research. Erik Devos acknowledges support from the J.P. Morgan Chase Bank Professorship in Business Administration. Spieler gratefully acknowledges a Summer Research Grant from the Frank G. Zarb School of Business. Earlier versions of this paper circulated under various other titles. We thank an anonymous referee, Alex Butler, Rob Campbell, David Downs, Bob Edelstein, Gangzhi Fan, Chinmoy Ghosh (APERS discussant), Patrick Lach, Toby Muhlhofer, Russell Price, Desmond Tsang, and participants at the Asia Pacific Real Estate Research Symposium, (APERS), AREUEA meetings, FMA meetings, APRU Symposium on Real Estate Research, and the AsRES-AREUEA conference for comments.

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Authors and Affiliations

  1. Department of Accounting and Finance, Eastern Michigan University, College of Business, Ypsilanti, MI, 48197, USA

    Elizabeth Devos

  2. Department of Economics and Finance, College of Business Administration, El Paso, TX, 79968, USA

    Erik Devos

  3. Department of Real Estate, School of Design and Environment, National University Singapore, Singapore, Singapore

    Seow Eng Ong

  4. Department of Finance, Frank G. Zarb School of Business, Hempstead, NY, 11549, USA

    Andrew C. Spieler

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  1. Elizabeth Devos
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Correspondence to Erik Devos.

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Devos, E., Devos, E., Ong, S.E. et al. Are REIT Investors Overly Optimistic after Equity Offerings?: Evidence from Analyst Forecast Errors. J Real Estate Finan Econ 59, 148–165 (2019). https://doi.org/10.1007/s11146-017-9608-1

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