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Analyst Activity and Firm Value: Evidence from the REIT Sector

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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.

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Notes

  1. Juergens (2000) is one of the few papers that investigate analyst activity (i.e. forecast revisions) for REITs. We discuss her paper in more detail in the next section.

  2. It is beyond the scope of this paper to review the extant literature. Several excellent reviews exist (see for example Brown 1993; Healy and Palepu 2001; Ramnath et al. 2005).

  3. Sayrak and Dhiensiri (2003) and Demiroglu and Ryngaert (2005) also look at the initial coverage initiation of analysts. Xu (2005) focuses on analysts’ coverage initiations and terminations and institutional investing decisions.

  4. Chang et al. (2000) find in an international context that forecast performance is worse for business groups, compared to regular firms.

  5. Alternatively, some analysts believe it is easier to value the cash flows and physical assets of equity REITs relative to the debt on an asset or a pool/derivative of debt. If this is the case we expect equity REITs to have less revisions as well as more accurate and less dispersed forecasts. We thank our referee for this suggestion.

  6. Gentry and Mayer (2003) find that the equity issuance and share repurchase decision of REITs is related to analyst following by Green Street Advisors.

  7. The I/B/E/S tapes available to us contain forecasts and actual data up to March 2005, whereas the 2004 Compustat tapes contain data for firms reporting earnings up to May 2005. Because we match I/B/E/S and Compustat based on announcement dates the number of observations representing 2004 may be somewhat smaller than that for other years. This is, however, a very minor problem given that most REITs have a fiscal year end of 12/31/04 and most report earnings for the 2004 year prior to the end of our I/B/E/S tape.

  8. Gentry and Mayer (2003) and Gentry et al. (2003) use NAV estimates as provided by Green Street Advisors. The authors note, however, that despite the accepted accuracy of the estimates, the analyst estimates are not truly public information and the coverage universe is a subset of REITs.

  9. Another alternative to the use of EPS is to compute FFO forecast by making the necessary accounting adjustments for depreciation/amortization and gain/loss from sale of investments. However, this alternative would still rely on EPS forecasts and historical accounting measures. As such, the variation in estimated FFO forecasts would still be driven by variations in EPS forecasts.

  10. When we investigate the distribution of the different REIT types by year, we find no significant evidence of time effects.

  11. To our knowledge the only paper that relates analyst following with performance is Wang et al. (1995b). They relate the number of analysts to a several performance variables (i.e. Jensen’s alpha, market adjusted returns, excess returns, and a Sharpe measure), for a relatively small number of REITs (90) in the period 1985–1989.

  12. We add 1 to the number of analyst forecasts to ensure rational values of the log function, i.e. log(1 + analyst forecasts).

  13. Some authors (Palia 2001 among others) have used advertising as a measure of growth opportunities.

  14. Chung and Jo (1996) use dispersion in most of their regressions. Because we use REIT-years with and without forecasts, dispersion is not available for many of our observations. Similarly, we use return variance instead.

  15. Because for a large number of observations the number of analysts equals zero, and the log of zero is not useful in regression analysis, we follow Chung and Jo (1996), Brennan and Subrahmanyan (1995) and Hong et al. (2000) by adding 1 before we take the log.

  16. Following Brennan and Hughes (1991) and Chung and Jo (1996) we use the reciprocal of share price.

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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.

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Authors and Affiliations

  1. Department of Economics and Finance, University of Texas-El Paso, El Paso, TX, 79968, USA

    Erik Devos

  2. Department of Real Estate, National University of Singapore, Singapore, Singapore

    Seow Eng Ong

  3. Department of Finance, Frank G. Zarb School of Business, Hofstra University, Hempstead, NY, 11549, USA

    Andrew C. Spieler

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  1. Erik Devos
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Devos, E., Ong, S.E. & Spieler, A.C. Analyst Activity and Firm Value: Evidence from the REIT Sector. J Real Estate Finan Econ 35, 333–356 (2007). https://doi.org/10.1007/s11146-007-9041-y

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