Journal of Real Estate Finance and Economics, 28:4, 355±367, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Market Signals Associated with REIT IPOs
Moyer Chair in Finance, The University of Akron, Akron, OH 44325, USA
Assistant Professor of Finance, Appalachian State University, Boone, NC 28608, USA
SunTrust Bank Professor of Finance, Department of Finance, Florida Atlantic University, Fort Lauderdale,
FL 33301, USA
THOMAS M. SPRINGER
Professor of Real Estate, Florida Atlantic University, 5353 Parkside Drive, Jupiter, FL 33458, USA
Previous studies have found signi®cant but time-varying valuation effects associated with real estate investment
trusts initial public offerings (REIT IPOs). Because REIT IPOs may disclose relevant information about real
estate market conditions, they may serve to revalue existing real estate securities. To determine whether REIT
IPOs signal information that is impounded into the share prices of other real estate securities, we assess the returns
on ``rival'' portfolios of existing real estate securities upon the issuance of the IPO. On average, the ``rival''
portfolios experience insigni®cant effects on the REIT IPO ®ling date, but negative and signi®cant abnormal
returns around the issue date. Across-sectional analysis of combined effects at the time of the ®ling date and issue
date shows that the negative effects on the ``rival'' portfolios are more pronounced when (1) the size of the REIT
IPO is larger, (2) market conditions are relatively weak, (3) more REIT IPOs come to market, and (4) the IPO is
not associated with an umbrella partnership REIT.
Key Words: REIT IPOs, REIT pricing and performance
Initial public offerings (IPOs) have been widely studied in the academic literature. In
general, research has shown that IPOs are underpriced and lead to excess short-run returns.
Speci®cally, for real estate investment trusts (REITs), IPOs are shown to be overpriced in
the 1980s (Wang et al., 1992), but underpriced in the 1990s (Ling and Ryngaert, 1997).
The observed variability of returns to IPOs has led to further research seeking an
understanding as to whether or not IPOs send signals to investors regarding the quality of
the ®rm involved in the IPO. In this paper, we consider that the short-term performance of
a REIT IPO can signal investors as to the performance of other real estate securities. That
is, the decision to take a REIT public may emit signals about performance of the real estate