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Information Asymmetry and REIT Capital Market Access

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Abstract

REITs hold relatively little cash and access capital markets often due to their favorable dividend tax status. The transparent nature of REITs, in theory, implies low information asymmetry. However, we present evidence that this phenomenon is temporal. We find that information asymmetry is relatively low when REITs access the capital markets, when compared to non-accessing periods, based on bid-ask spreads for a large number of REITs. Further, we find that REIT size and turnover affect bid-ask spreads, but the pattern of lower bid-ask spreads surrounding capital market access does manifest itself when we investigate subsamples, dependent on size and turnover. Our findings are consistent with the idea that REITs increase their disclosure when they access the capital markets, which in turn lowers information asymmetry.

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Notes

  1. See Ling and Ryngaert (1997) for a discussion of the valuation in the context of IPOs in primary and secondary markets. In related research, Dolvin and Pyles (2009) examine REIT IPOs and find lower offer price revisions which is consistent with relatively low information asymmetry.

  2. Although, as a robustness test, we also investigate information asymmetry using absolute analyst forecast errors.

  3. This excludes offerings of preferred shares. These values have been of the same magnitude (or higher) in the last decade, or so. From: https://www.reit.com/sites/default/files/IndustryData/HistOff1612.pdf.

  4. To our knowledge, there are few papers that investigate related issues. Devos et al. (2017) use analyst forecasts to investigate optimism surrounding REIT equity offerings, and Devos et al. (2016) provide evidence that recommendations of book runners may be more optimistic around SEOs. However, these papers focus on analyst behavior instead of spreads, which limits their sample size considerably, relative to the sample size in our analyses.

  5. Price provides the data from his website, http://www.mckayprice.com/research.html. The earliest starting date is 1993.

  6. Our inferences are qualitatively similar when we match only on size or turnover.

  7. The differences between the spreads of large and small REITs are significantly different at the 1% level.

  8. Again, the differences between high and low turnover spreads are significant at the 1% level.

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Acknowledgement

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 Alex Butler, Rob Campbell, David Downs, Bob Edelstein, Patrick Lach, Toby Muhlhofer, Russell Price, Desmond Tsang, and participants at ARES meetings, AREUEA meetings, FMA meetings, APRU Symposium on Real Estate Research, and the AsRES-AREUEA conference for comments. An earlier version of this paper won the best manuscript in “Real Estate Finance” award at the 2017 ARES meetings.

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Authors and Affiliations

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

    Elizabeth Devos

  2. Ellis and Susan Mayfield Chair in Business Administration and Professor of Finance, Department of Economics and Finance, College of Business Administration, University of Texas at El Paso, El Paso, TX, 79968, USA

    Erik Devos

  3. Department of Real Estate, School of Design and Environment, National University of Singapore, Singapore, 117566, Singapore

    Seow Eng Ong

  4. Department of Finance, Frank G. Zarb School of Business, Hofstra University, 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. Information Asymmetry and REIT Capital Market Access. J Real Estate Finan Econ 59, 90–110 (2019). https://doi.org/10.1007/s11146-018-9678-8

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