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The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions. July 6 ERES 2013, Vienna. Vivek Sah University of San Diego. Introduction. Equity market timing theory Issuing stocks at high prices & repurchasing at low prices In context of REITs
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The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions July 6 ERES 2013, Vienna Vivek Sah University of San Diego
Introduction • Equity market timing theory • Issuing stocks at high prices & repurchasing at low prices • In context of REITs • Sharp decline creates a unique buying opportunity • REITs may trade well below their liquidation values • A positive price change for REIT announcing going-private decision.
Intra-Industry information transfers • Propagation of unexpected shocks from a particular firm to the other firms in the same sectors • Contagion • Information about one particular firm suggests the same problem for the other firms (Lang and Stulz, 1992)
Contagion • Similarity between firms could be affected in the same direction by the same information • Competitive effect may also exist • Exit from the public market of a firm will increase the relative competitive position for the other firms in the same industry
Research hypothesis • Will privatization announcement lead to a contagion effect on other REITs?
Motivations for the study • Independent REIT sector provides a setting to examine contagion effect • Contagion effect • In real estate market, properties are not frequently traded • Portfolio value is not mark-to-market • Limited information is provided for participants to evaluate the “true” market value
Literature review • Lang and Stulz (1992) • Negative impact on the portfolio value of competitors with the same SIC • Erwin and Miller (1998) • Rival firms experience a significant negative stock price reaction • Laux, Starks and Yoon (1998) • Dividend change announcement affects
Contd… • Ghosh, Guttery and Sirmans (1998) • REIT adversely affected by bad performance announcement of financial institutions’ real estate portfolios • Elliott, Highfield and Schaub (2006) • No contagion effect but modest competitive effect for audit opinion announcements
Data • REIT privatization data from January 1999 and December 2010 from SNL • CRSP database for REIT returns
Methodology • Forbes and Rigobon (2002) • VAR model adopted • Collins and Gavron (2005) • Adjusted correlation coefficient
Matched sample for REITs • By size using market capitalization as the proxy • REITs in the same property type • Three portfolios based on market capitalization one-year before the announcement quarter • REITs grouped into three portfolios based on liquidity one-year prior to the announcement quarter • Matched REITs to keep their REIT status in the next 2 years after the sample REIT announcement date
Test for Presence of Contagion • Significant increase in the correlation coefficient of the expected index returns • Between the REIT and the Index from a ‘stable period’ prior to the event and a ‘turmoil period’ immediately following the event
VAR Model and adjusted correlation coefficient • VAR used to calculate the variance-covariance matrices during the stable period and turmoil period • Forbes and Rigobon (2002) • 2. Adjusted correlation coefficient is then calculated based on VAR variance-covariance matrices • Collins and Gavron (2005)
Contd… • Contagion represents an increase in co-movement between REIT returns. • Significant increase in the correlation coefficient of the expected from a ‘stable period’ and a ‘turmoil period’
Conclusion and further analysis • Half of the sample display some contagion affect • No consensus • Testing characteristics of REITs which show contagion