How accurate are A-REIT IPO dividend forecasts?

Publication Date06 Nov 2019
AuthorBill Dimovski,Rebecca Ratcliffe,Christopher Ratcliffe,Monica Keneley,Scott Salzman
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
How accurate are A-REIT IPO
dividend forecasts?
Bill Dimovski, Rebecca Ratcliffe, Christopher Ratcliffe and
Monica Keneley
Department of Finance, Deakin University, Melbourne, Australia, and
Scott Salzman
Deakin University, Melbourne, Australia
Purpose The purpose of this paper is to investigate the accuracy of Australian Real Estate Investment
Trust (A-REIT) initial public offering (IPO) dividend forecasts between 1994 and 2016.
Design/methodology/approach This study compares the dividend forecasts of A-REIT IPOs forthe first
dividend forecast period in the prospectus, with the actual dividend declared for that forecast period. As well
as simple descriptive summary measures, this study also employs an exact logistic regression approach to
examine the factors that might influence the IPOs achieving or exceeding the dividend forecast.
Findings The study identifies that the dividends declared, on average, were greater than the dividend
forecast and thatmore than nine out of ten of the IPOs listed after 1999 achievedor exceeded their prospectus
forecast.In addition the authorsobserve positive mean forecasterrors, suggestingdividend forecasts inA-REIT
IPOs, are cautiouslybiased. This is in contrast to the industrial company data reported in Brown et al. (2000)
which suggestdividend forecasts are optimistically biased. Thestudy also finds the A-REIT IPOsthat did not
forecast a dividend,generally did not pay a dividend.
Practical implications The results will inform dividend seeking institutional and retail investors of the
investment opportunities in A-REIT IPOs.
Originality/value This paper adds to the discussion of the relative predictability of dividends of A-REIT
IPOs compared to industrial company IPOs.
Keywords Australia, A-REITs, IPOs, Accuracy, Dividend forecasts, Exact logistic regression
Paper type Research paper
1. Introduction
Forecasted dividends are important because they influence the valuation of firms.
Uncertainty surrounding the accuracy of these forecasted dividends complicates the
valuation. The accuracy of prospectus dividend forecasts is likely to be important to
investors in initial public offering (IPO) firms since the value of those firms is theoretically
the discounted value of the future cash/dividend flows. If the future dividend flows are
grossly overestimated, the value of the IPO itself is likely to be overestimated.
While financial analysts often forecast dividends of listed public companies and
consensus analyst dividend forecasts have been discussed by academics (see e.g. Brown
et al., 2002, 2008), there is little in the academic literature regarding management dividend
forecasts of Real Estate Investment Trust (REIT) IPOs. These REIT IPOs have no public
history of dividend declarations, and since managers would be closest to all the available
information about the soon to be listed REIT, it would be useful for investors to know the
accurateness of managers IPO dividend forecasts before the IPO investment is made.
Most of what we know about the accuracy of IPO dividend forecasts comes from the
literature examining industrial company IPOs. As dividends are linked to earnings
(indeed, in Australia dividends must be paid from earnings), this study considers the
dividend forecast accuracy and earnings forecast accuracy literature. In early work in
Australia, Brown et al. (2000), with a sample of 172 industrial company IPOs between 1984
and 1997, reported that 43 per cent of these IPOs over-predicted the amount of dividend
and 54 per cent over-predicted the earnings amount.
Journal of Property Investment &
Vol. 38 No. 1, 2020
pp. 47-55
© Emerald PublishingLimited
DOI 10.1108/JPIF-05-2019-0066
Received 16 May 2019
Revised 13 September 2019
Accepted 14 October 2019
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