Abstract
We examine Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) that went public between 1986 and 2004. Consistent with previous studies, we find that REIT IPOs are associated with lower levels of underpricing relative to traditional issues. We also find that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. In contrast, using an alternative measure of issuance costs that incorporates the share retention decision by preexisting owners, we find no significant difference between REIT and non-REIT issues, suggesting the results of previous studies are not robust to various specifications of issuance cost and that preexisting owners do not necessarily benefit from the lower level of underpricing. Additionally, we find no difference in the issuance costs of equity versus mortgage REITs, particularly once we control for the use of umbrella partnerships.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Underpricing is often defined as the percentage change from the offer price to the closing market price on the first day of trading; however, these are equivalent definitions.
Hybrid REITs, which could be considered a third type, invest in both physical and financial assets. These, however, make up a small fraction of the REIT population.
There are 410 non-REITs with dual class shares. This structure is non-existent in REITs, which may be attributable to the use of umbrella partnerships.
All coefficients are estimated using White’s adjustment and are, therefore, heteroscedastic-consistent.
References
Barry, C. B. (1984). Initial public offering underpricing: The issuer’s view—A comment. Journal of Finance, 44(4), 1099–1103.
Benveniste, L. M., & Spindt, P. A. (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, 24(1), 213–232.
Bradley, D. J., Cooney, J., Jordan, B. D., & Singh, A. (2004). Negotiation and the IPO offer price: A comparison of integer versus non-integer IPO’s. Journal of Financial and Quantitative Analysis, 39(3), 517–540.
Bradley, D. J., & Jordan, B. D. (2002). Partial adjustment to public information. Journal of Financial and Quantitative Analysis, 37(4), 595–616.
Carter, R. B., & Manaster, S. (1990). Initial public offerings and underwriter reputation. Journal of Finance, 45(4), 1045–1067.
Chan, S. H., Leung, W. K., & Wang, K. (1998). Institutional Investment in REITs: Evidence and Implications. Journal of Real Estate Research, 16(3), 357–374.
Chan, S. H., Stohs, M. H., & Wang, K. (2001). Are real estate IPOs a different species? Evidence from Hong Kong IPO’s. Journal of Real Estate Research, 21(3), 201–220.
Dolvin, S. D. (2005). Market structure, changing incentives and underwriter certification. Journal of Financial Research, 28(3), 403–419.
Dolvin, S. D., & Jordan, B. D. (2007). Underpricing, overhang, and the cost of going public to preexisting shareholders. Working Paper Series.
Fass, P. M., Shaff, M. E., & Zief, D. B. (1996). Real estate investment trust handbook. New York, NY: Clark, Boardman, and Callaghan.
Gompers, P. A. (1996). Grandstanding in the venture capital industry. Journal of Financial Economics, 42(1), 133–156.
Hartzell, J. C., Kallberg, J. G., & Liu, C. H. (2005). The Role of the Underlying Real Asset Market in REIT IPOs. Real Estate Economics, 33(1), 27–50.
Jarchow, S. P. (1988). Real estate investment trusts. New York: Wiley.
Ling, D. C., & Ryngaert, M. D. (1997). Valuation uncertainty, institutional involvement, and the case of underpricing of IPOs: The case of REITs. Journal of Financial Economics, 43(3), 433–456.
Loughran, T., & Ritter, J. R. (2002). Why don’t issuers get upset about leaving money on the table in IPOs? Review of Financial Studies, 15(2), 413–443.
Loughran, T., & Ritter, J. R. (2004). Why has underpricing increased over time? Financial Management, 33(3), 5–37.
Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(2), 187–212.
Wang, K., Chan, S. H., & Gau, G. W. (1992). Initial public offerings of equity offerings: Anomalous evidence using REITs. Journal of Financial Economics, 31(3), 381–410.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Dolvin, S.D., Pyles, M.K. REIT IPOs and the Cost of Going Public. J Real Estate Finan Econ 39, 92–106 (2009). https://doi.org/10.1007/s11146-007-9101-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11146-007-9101-3