Efficient markets versus behavioral anomalies: the case of REITs
| Pages | 413-424 |
| Published date | 10 July 2009 |
| DOI | https://doi.org/10.1108/14635780910972314 |
| Date | 10 July 2009 |
| Author | Alexander Joel‐Carbonell,Nico B. Rottke |
| Subject Matter | Property management & built environment |
Efficient markets versus
behavioral anomalies: the case of
REITs
Alexander Joel-Carbonell and Nico B. Rottke
European Business School, Real Estate Management Institute,
Wiesbaden, Germany
Abstract
Purpose – This paper seeks to research potential evidence of capital market irregularities by
scrutinizing whether the IPO (Initial Public Offering) phenomenon can be found in Real Estate
Investment Trusts (REITs).
Design/methodology/approach – The study employs stock price data of 90 US REITs and derives
their performance on the first trading day, but also on a one-, three-, and five-year basis.
Findings – The primary offerings puzzle frequently observedintraditionalIPOsisamarketimperfection
that also exists for REITs from 1991 to 2008. REITs display, on average, both significant first trading day
under-pricing and negative aftermarket performance, predominantly on a five-year basis.
Research limitations/implications – The research at hand offers evidence that stock
irregularities can be found within the US REIT industry, albeit these do not necessarily serve as
evidence against efficient markets. Notwithstanding the fact that it may be difficult to exploit the
abnormal performance on the first day, investors can nonetheless earn substantial profits by shorting
IPO stocks on a long-term basis. Even net of transaction costs, such a strategy should have a positive
abnormal return. However, these investments have to be executed cautiously as the profitability of
such a strategy has to pay attention to the reputation of the underwriter, the cycle in which the IPO
takes place and various other important factors.
Originality/value – The research at hand offers evidence that REIT market irregularities oppose
underlying rational human behavior.
Keywords Real estate, Capitalmarkets, Finance, Underwriting
Paper type Research paper
1. Introduction
Academics but also governmental institutions argue that the steep worldwide decline
in stock prices subsequent to the US sub prime crisis is not justified by fundamental
economic data. Rather, the market, instead of carefully evaluating the business
environment and its respective figures, appears to overreact which leads to negativ e
momentum. This contradiction is particularly captivating from the perspective of
capital market theory. A total of 50 years ago, most academics were convinced of the
theory of efficient markets which assumes that investors behave reasonably, while
during the last two decades overreaction could mainly be explained by the more
tolerant behavioral economics/finance framework. These financial theories heavily
contradict each other and the validity of both hypotheses has been widely discussed for
more than 20 years.
The research at hand offers evidence that REIT market irregularities oppose
underlying rational human behavior. The IPO anomaly has been carefully selected
because it emerged early on and more importantly, has recently been reported to still
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Efficient markets
413
Received October 2008
Accepted March 2009
Journal of Property Investment &
Finance
Vol. 27 No. 4, 2009
pp. 413-424
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910972314
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