Real Estate Investment Trusts and Stock Price
STEPHEN J. LARSON
Eastern Illinois University, 3010 Lumpkin Hall, 600 Lincoln Avenue, Charleston, IL 61920, USA
A trigger value of j5% is used to identify a sample of real estate trusts (REITS) that experience substantial
one-day price declines. Abnormal returns are then calculated for the subsequent two-day period. The results of
this study suggest stock price reversals are associated with extreme stock price declines for REITS. Hence, it
appears the market overreacts at the time unfavorable information about REITS is disseminated. The degree of
reversal across the sample is assessed according to variables such as the initial price decline (day 0), pre-event
leakage (day j1), size (capitalization), the type of real estate investment trust, and relative trading volume.
Key Words: real estate investment trust, overreaction, market efficiency
Researchers have studied stock price reversals for two decades. Typically, samples are
identified using a trigger value of ten-percent where losers are stocks that experience
one-day price declines of at least ten-percent. This study addresses reversals following
one-day price declines of at least five percent for REITS. A ten percent trigger value was
attempted, but it did not identify enough events pertaining to these securities, which
represent portfolios of property and (or) mortgages.
Bremer and Sweeney (1991) study large one-day price declines (at least 10%)
for Fortune 500 companies trading between 1962 and 1986. They conclude a re-
versal is associated with extreme price declines by assessing abnormal returns over
the post-event period. Cox and Peterson (1994) also examine losers only. They
include firms trading on the New York Stock Exchange, the American Stock Exchange,
and over the counter during the period 1963 to 1991. They report similar evidence to
Bremer and Sweeney.
There are two primary reasons reversals may be unique for REITS. First, REITS are
portfolios of real estate and (or) mortgages so price fluctuations are generally less severe,
and business news sources, such as the Wall Street Journal’s Abreast of the Market
column, tend to report on stocks experiencing the largest price changes. Larson and
Madura (2003) suggest a lack of published information at the time of the initial price
change is associated with stronger reversals. Second, Cox and Peterson (1994) imply
larger reversals are associated with stocks that are less liquid. In light of these reasons,
The Journal of Real Estate Finance and Economics, 30:1, 81–88, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.