Abstract
The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firm's true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Allen, F., and G. R. Faulhaber. (1989). ""Signaling by Underpricing in the IPO Market,” Journal of Financial Economics 23, 303-323.
Carter, R. B. (1992). ""Underwriter Reputation and Repetitive Public Offerings,” Journal of Financial Research 15, 341-354.
Carter, R. B., F. H. Dark, and A. K. Singh. (1998). ""Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks,” Journal of Finance 53, 285-311.
Carter, R. B., and S. Manaster. (1990). ""Initial Public Offerings and Underwriter Reputation,” Journal of Finance 45, 1045-1067.
Chadwick, W. J. (1993). ""Equity REIT Securities: New Investment for Pension Funds?” Real Estate Finance Journal (Fall), 24-30.
Chemmanur, T. J. (1993). ""The Pricing of Initial Public Offerings: A Dynamic Model with Information Production,” Journal of Finance 48, 285-304.
Garfinkel, J. A. (1993). ""IPO Underpricing, Insider Selling and Subsequent Equity Offerings: Is Underpricing a Signal of Quality?” Financial Management 22, 74-83.
Ghosh, C., R. Nag, and C. F. Sirmans. (1997). ""Financing Choice by Equity REITs in the 1990s,” Real Estate Finance 14, 41-50.
Ghosh, C., R. Nag, and C. F. Sirmans. (1999). ""An Analysis of Seasoned Equity Offerings by Equity REITs (1991-1995),” Journal of Real Estate Finance and Economics 19, 175-192.
Ghosh, C., R. Nag, and C. F. Sirmans. (2000). ""The Pricing of Seasoned Equity Offerings: Evidence from REITs,” Real Estate Economics, forthcoming.
Grinblatt M., and C. Y. Hwang. (1989). ""Signaling and the Pricing of New Issues,” Journal of Finance 44, 393-420.
Hayes, S., M. Spence, and D. Marks. (1983). Competition in the Investment Banking Industry. Cambridge, MA: Harvard University Press.
Ibbotson, R. (1975). ""Price Performance of Common Stock New Issues,” Journal of Financial Economics 2, 235-272.
Ibbotson, R., J. L. Sindlear, and J. R. Ritter. (1994). ""The Market's Problem with the Pricing of Initial Public Offerings,” Journal of Applied Corporate Finance 7, 66-74. Investment Dealers Digest. (1992-1996).
James, C. (1992). ""Relationship Specific Assets and the Pricing of Underwriter Services,” Journal of Finance 47, 1865-1885.
Jegadeesh, N., M. Weinstein, and I. Welch. (1993). ""An Empirical Investigation of IPO Returns and Subsequent Equity Offerings,” Journal of Financial Economics 34, 153-175.
Ling, D. C., and M. Ryngaert. (1997). ""Valuation Uncertainty, Institutional Involvement, and the Underpricing of IPOs: The Case of REITs,” Journal of Financial Economics 43, 433-456.
Loderer, C. F., D. P. Sheehan, and G. B. Kadlec. (1991). ""The Pricing of Equity Offerings,” Journal of Financial Economics 29, 35-57.
Myers, S., and N. Majluf. (1984). ""Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have,” Journal of Financial Economics 13, 187-221.
Parsons, J. E., and A. Raviv. (1985). ""Underpricing of Seasoned Issues,” Journal of Financial Economics 14, 377-397.
National Association of Real Estate Investment Trusts. (1992-1996). REIT Handbook. Washington D.C: NAREIT.
Ritter, J. (1991). ""The Long-Run Performance of Initial Public Offerings,” Journal of Finance 46, 3-27.
Rock, K. (1986). ""Why New Issues Are Underpriced,” Journal of Financial Economics 15, 187-212.
Slovin, M. B., M. E. Sushka, and Y. M. Bendeck. (1994). ""Seasoned Common Stock Issuance Following an IPO,” Journal of Banking and Finance 18, 207-226.
Smith, Jr., C. W. (1986)""Investment Banking and the Capital Acquisition Process,” Journal of Financial Economics 15, 3-29.
Smith, Jr., C. W. (1977). ""Alternative Methods for Raising Capital: Rights Versus Underwritten Offerings,” Journal of Financial Economics 5, 273-307.
Spiess, D. K., and R. H. Pettway. (1997). ""The IPO and First Seasoned Equity Sale: Issue Proceeds, Owner/Managers' Wealth, and the Underpricing Signal,” Journal of Banking and Finance 21, 967-988.
Tinic, S. M. (1988). ""Anatomy of Initial Public Offerings of Common Stock,” Journal of Finance 43, 789-822.
Wang, K., G. Gau, and S. H. Chan. (1992). ""Initial Public Offerings of Equity Securities: Anomalous Evidence Using REITs,” Journal of Financial Economics 31, 381-410.
Welch, I. (1989). ""Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings,” Journal of Finance 44, 421-449.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Ghosh, C., Nag, R. & Sirmans, C. A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs. The Journal of Real Estate Finance and Economics 20, 137–154 (2000). https://doi.org/10.1023/A:1007873120566
Issue Date:
DOI: https://doi.org/10.1023/A:1007873120566