The Journal of Real Estate Finance and Economics

, Volume 35, Issue 3, pp 333–356 | Cite as

Analyst Activity and Firm Value: Evidence from the REIT Sector

Article

Abstract

This paper is the first to examine (1) properties of analyst forecasts and (2) effects of analyst following on firm value for all REITs on CRSP, Compustat and I/B/E/S. Our results suggest that REITs operate in an information environment that has changed over time. We find that for periods when the REIT industry was either in the developmental stage (pre-1992), or after other structural changes in the industry (post-2000), more analysts cover REITs and forecasts are more accurate and less biased. Further, we find that mortgage REITs are more transparent than other REIT structures and exhibit properties of analyst behavior that are different from other types of REITs. Our investigation into the effect of analyst coverage on REIT value suggests that analyst coverage increases REIT value (as measured by Tobin’s q) and that the causality does not run the opposite way.

Keywords

REIT Analyst forecasts 

Notes

Acknowledgements

We wish to thank Alex Butler, Rob Campbell, Jim Clayton, Esmeralda Lyn, Milena Petrova, Kelvin Wong and participants at the 2006 AsRES-AREUEA International conference, Vancouver, BC and the 2006 Hong Kong University–National University of Singapore Symposium on Real Estate Research. Spieler gratefully acknowledges a Summer Research Grant from the Frank G. Zarb School of Business. We thank Michael DeBello and Jason Paul for excellent research assistance. 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.

References

  1. Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 15, 223–250.CrossRefGoogle Scholar
  2. Amihud, Y., & Mendelson, H. (2000). The liquidity route to a lower cost of capital. Journal of Applied Corporate Finance, 12, 10–25.CrossRefGoogle Scholar
  3. Angel, J. J. (1997). Tick size, share prices, and stock splits. Journal of Finance, 52, 655–681.CrossRefGoogle Scholar
  4. Asquith, P., Mikhail, M. B., & Au, A. S. (2005). Information content of equity analyst reports. Journal of Financial Economics, 75, 245–282.CrossRefGoogle Scholar
  5. Barth, M. E., Kasznik, R., & McNichols, M. F. (2001). Analyst coverage and intangible assets. Journal of Accounting Research, 39, 1–34.CrossRefGoogle Scholar
  6. Benveniste, L., Capozza, D. R., & Seguin, P. J. (2001). The value of liquidity. Real Estate Economics, 29, 633–660.CrossRefGoogle Scholar
  7. Bhushan, R. (1989). Firm characteristics and analyst following. Journal of Accounting and Economics, 11, 255–274.CrossRefGoogle Scholar
  8. Bradley, M., Capozza, D. R., & Seguin, P. J. (1996) Dividend policy and cash-flow uncertainty. Real Estate Economics, 26, 555–580.CrossRefGoogle Scholar
  9. Brennan, M., & Hughes, P. (1991). Stock prices and the supply of information. Journal of Finance, 46, 1665–1691.CrossRefGoogle Scholar
  10. Brennan, M., & Subrahmanyan, A. (1995). Investment analysis and price formation in securities markets. Journal of Financial Economics, 38, 361–381.CrossRefGoogle Scholar
  11. Brennan, M., & Tamarowski, C. (2000). Investor relations, liquidity and stock prices. Journal of Applied Corporate Finance, 12, 26–37.CrossRefGoogle Scholar
  12. Brown, L. (1993). Earnings forecasting research: Its implications for capital markets research. International Journal of Forecasting, 9, 295–320.CrossRefGoogle Scholar
  13. Brown, L., & Rozeff, M. (1978). The superiority of analyst forecasts as measures of expectations: Evidence form earnings. Journal of Finance, 33, 1–16.CrossRefGoogle Scholar
  14. Chan, S. H., Leung, W., & Wang, K. (2005). Changes in REIT structure and stock performance: Evidence form the Monday stock anomaly. Real Estate Economics, 33, 89–120.CrossRefGoogle Scholar
  15. Chang, J. J., Khanna, T., & Palepu, K. (2000). Analyst activity around the world. Harvard University—Working Paper.Google Scholar
  16. Chui, A., Titman, S., & Wei, K. C. (2003). The cross-section of expected REIT returns. Real Estate Economics, 31, 451–479.CrossRefGoogle Scholar
  17. Chung, K. H., & Jo, H. (1996). The impact of security analysts’ monitoring and marketing functions on the market value of firms. Journal of Financial and Quantitative Analysis, 31, 493–512.CrossRefGoogle Scholar
  18. Clement, M. B. (1999). Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter? Journal of Accounting and Economics, 27, 285–303.CrossRefGoogle Scholar
  19. Das, S., Levine, C. B., & Sivaramakrishan, K. (1998). Earnings predictability and bias in analysts’ earnings forecasts. Accounting Review, 73, 277–294.Google Scholar
  20. Demiroglu, C., & Ryngaert, M. (2005). Analyst coverage initiations on previously uncovered stocks. University of Florida—Working Paper.Google Scholar
  21. Doukas, J. A., Kim, C., & Pantzalis, C. (2000). Security analysis, agency costs, and company characteristics. Financial Analysts Journal, 56, 54–63CrossRefGoogle Scholar
  22. Downs, D. H. (1998). The value in targeting institutional investors: Evidence from the five-or-fewer rule change. Real Estate Economics, 26, 613–649.CrossRefGoogle Scholar
  23. Downs, D. H., & Güner, Z. N. (1999). Is the information deficiency in real estate evident in public market trading? Real Estate Economics, 27, 517–541.CrossRefGoogle Scholar
  24. Downs, D. H., & Güner, Z. N. (2000). Investment analysis, price formation and neglected firms: Does real estate make a difference? Real Estate Economics, 28, 549–579.CrossRefGoogle Scholar
  25. Dunn, K., & Nathan, S. (1998). The effect of industry diversification on consensus and individual analysts’ earnings forecasts. Georgia State University — Working Paper.Google Scholar
  26. Easterbrook, F. (1984). Two agency-cost explanations of dividends. American Economic Review, 74, 650–659.Google Scholar
  27. Fields, T. D., Rangan, S., & Thiagarajan, S. R. (1998). An empirical evaluation of the usefulness of non-GAAP accounting measures in the real estate investment trust industry. Review of Accounting Studies, 3, 103–1030.CrossRefGoogle Scholar
  28. Francis, J., & Soffer, L. (1997). The relative informativeness of analysts’ stock recommendations and earnings forecast revisions. Journal of Accounting Research, 35, 193–211.CrossRefGoogle Scholar
  29. Gentry, W. M., Kemsley, D., & Mayer, C. J. (2003). Dividend taxes and share prices: Evidence from real estate investment trusts. Journal of Finance, 63, 261–282.CrossRefGoogle Scholar
  30. Gentry, W. M., & Mayer, C. J. (2003). The effects of share prices relative to ‘Fundamental’ value on stock issuances and repurchases. University of Pennsylvania—Working Paper.Google Scholar
  31. Ghosh, C., Miles, M., & Sirmans, C. F. (1996). Are REITs stocks? Real Estate Finance, 13, 46–53.Google Scholar
  32. Ghosh, C., & Sirmans, C. F. (2005). On REIT CEO compensation: Does board structure matter? Journal of Real Estate Finance and Economics, 30, 397–428.CrossRefGoogle Scholar
  33. Givoly, D., & Lakonishok, J. (1979). The information content of financial analysts’ forecasts of earnings: Some evidence on semi-strong efficiency. Journal of Accounting and Economics, 2, 165–186.CrossRefGoogle Scholar
  34. Glascock, J. L., Hughes, W. T., & Varshney, S. B. (1998). Analysis of REIT IPOs using a market microstructure approach: Anomalous behavior of asset structure. Journal of Real Estate Finance and Economics, 16, 243–256.CrossRefGoogle Scholar
  35. Grullon, G. (2004). Advertising, breadth of ownership, and liquidity. Review of Financial Studies, 17, 439–461.CrossRefGoogle Scholar
  36. Han, B. (2006) Insider ownership and firm value: Evidence from real estate investment trusts. Journal of Real Estate Finance and Economics, 32, 471–493.CrossRefGoogle Scholar
  37. Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRefGoogle Scholar
  38. Hong, H., Lim, T., & Stein, J. (2000). Bad news travels slowly: Size, analyst coverage, and the profitability of momentum strategies. Journal of Finance, 55, 265–295.CrossRefGoogle Scholar
  39. Irvine, P. (2003). The incremental impact of analyst initiation of coverage. Journal of Corporate Finance, 9, 431–451.CrossRefGoogle Scholar
  40. Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323–329.Google Scholar
  41. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 306–360.Google Scholar
  42. Jensen, M., & Murphy, K. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98, 225–264.CrossRefGoogle Scholar
  43. Juergens, J. (2000). The information content of analysts’ forecasts of REIT earnings. Pennsylvania State University—Working paper.Google Scholar
  44. Li, J., Mooradian, R. M., & Yang, S. X. (2006). Conditional expectation and the variability of equity REIT returns. Working paper, Northeastern University.Google Scholar
  45. Merton, R. C. (1987). Presidential address: A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510.CrossRefGoogle Scholar
  46. Morck, R., Shleifer, A, & Vishny, R. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293–315.CrossRefGoogle Scholar
  47. Morck, R., & Yeung, B. (1991). Why investors value multinationality. Journal of Business, 64, 165–187.CrossRefGoogle Scholar
  48. Moyer, R. C., Chatfield, R. E., & Sisneros, P. M. (1989). Security analyst monitoring activity: Agency costs and information demands. Journal of Financial and Quantitative Analysis, 24, 503–512.CrossRefGoogle Scholar
  49. O’Brien, P. C. (1988). Analysts’ forecasts as earnings expectations. Journal of Accounting and Economics, 10, 159–193.CrossRefGoogle Scholar
  50. O’Brien, P. C. (1990). Forecast accuracy of individual analysts in nine industries. Journal of Accounting Research, 28, 286–304.CrossRefGoogle Scholar
  51. Palia, D. (2001). The endogeneity of managerial compensation in firm valuation: A solution. Review of Financial Studies, 14, 735–764.CrossRefGoogle Scholar
  52. Ramnath, S., Rock, S., & Shane, P. (2005). A review of research related to financial analysts’ forecasts and stock recommendations. Georgetown University—Working paper.Google Scholar
  53. Roulstone, D. T. (2003). Analyst following and market liquidity. Contemporary Accounting Research, 20, 551–578.CrossRefGoogle Scholar
  54. Sayrak, A., & Dhiensiri, N. (2003). The value effects of analysts’ coverage initiations. University of Pittsburgh—Working paper.Google Scholar
  55. Shin, H., & Stulz, R. H. (2000). Firm value, risk, and growth opportunities. NBER Working paper.Google Scholar
  56. Shivdasani, A. (1993). Board composition, ownership structure, and hostile takeovers. Journal of Accounting and Economics, 167–198.Google Scholar
  57. Sinha, P., Brown, L. D., & Das, S. (1997). A re-examination of financial analysts’ differential earnings forecast accuracy. Contemporary Accounting Research, 14, 1–42.CrossRefGoogle Scholar
  58. Stickel, S. (1989). The timing and incentives for annual earnings forecasts near interim earnings announcements. Journal of Accounting and Economics, 11, 275–292.CrossRefGoogle Scholar
  59. Thomas, S. (2002). Firm diversification and asymmetric information: Evidence form analysts’ forecasts and earnings announcements. Journal of Financial Economics, 64, 373–396.CrossRefGoogle Scholar
  60. Tse, Y., & Devos, E. (2004). Trading costs, investor recognition and market response: An analysis of firms that move from the Amex (Nasdaq) to Nasdaq (Amex). Journal of Banking and Finance, 28, 63–83.CrossRefGoogle Scholar
  61. Wang, K., Erickson, J., & Chan, S. H. (1995a).Does the REIT stock market resemble the general stock market? Journal of Real Estate Research, 10, 445–460.Google Scholar
  62. Wang, K., Erickson, J., Gau, G., & Chan, S. H. (1995b).Market microstructure and real estate returns. Real Estate Economics, 23, 85–100.CrossRefGoogle Scholar
  63. Womack, K. L. (1996). Do brokerage analysts’ recommendations have investment value? Journal of Finance, 51, 137–167.CrossRefGoogle Scholar
  64. Xu, L. (2005). Institutional investing activities and firms’ information environments before and after analysts coverage initiation and termination. Duke University—Working Paper.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of Economics and FinanceUniversity of Texas-El PasoEl PasoUSA
  2. 2.Department of Real EstateNational University of SingaporeSingaporeSingapore
  3. 3.Department of Finance, Frank G. Zarb School of BusinessHofstra UniversityHempsteadUSA

Personalised recommendations