Contagion Effects in REIT Privatization Transactions: An Analysis

1. The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions July 6 ERES 2013, Vienna Vivek Sah University of San Diego

2. 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.

3. 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)

4. 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

5. Research hypothesis • Will privatization announcement lead to a contagion effect on other REITs?

6. 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

7. 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

8. 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

9. Data • REIT privatization data from January 1999 and December 2010 from SNL • CRSP database for REIT returns

10. Methodology • Forbes and Rigobon (2002) • VAR model adopted • Collins and Gavron (2005) • Adjusted correlation coefficient

11. Privatization deals

12. Results - Event study

13. Contd…

14. 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

15. Event study – Matched Sample

16. Contd…

17. 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

18. 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)

19. 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’

20. Summary of results

21. Conclusion and further analysis • Half of the sample display some contagion affect • No consensus • Testing characteristics of REITs which show contagion

22. Thank you