Institutional involvement and the REIT January effect over time
| DOI | https://doi.org/10.1108/14635780310508612 |
| Pages | 435-449 |
| Date | 01 December 2003 |
| Published date | 01 December 2003 |
| Author | Ming‐Long Lee,Ming‐Te Lee |
| Subject Matter | Property management & built environment |
January effect
over time
435
Journal of Property Investment &
Finance
Vol. 21 No. 6, 2003
pp. 435-449
#MCB UP Limited
1463-578X
DOI 10.1108/14635780310508612
Institutional involvement and
the REIT January effect
over time
Ming-Long Lee
Department of Finance, National Yulin University of Science and
Technology, Touliu, Yulin, Taiwan, and
Ming-Te Lee
Department of Accounting, Soochow University, Taipei, Taiwan
Keywords Real estate, Investments, Financial institutions, Tax planning
Abstract The Revenue Reconciliation Act of 1993, implemented since 1 January 1994,
facilitates the increase of institutional investment in the real estate investment trust (REIT)
market. Utilizing this particular feature in the market, we examine the time-series effect of
institutional holdings to distinguish the tax-loss-selling hypothesis and the window-dressing
hypothesis for REITs. Consistent with the tax-loss-selling hypothesis, we have evidence that the
January premiums decreased with the level of institutional involvement for REITs. Furthermore
the January premiums declined significantly for equity REITs only that attracted more
institutional investors than mortgage REITs. On the other hand, the January premiums did not
decrease significantly for mortgage REITs. Overall the results suggest that trading strategies to
profit the higher January returns may work only when institutional investors exit and leave the
market.
1. Introduction
January returns of investments are significant higher than any other month
during the year. This return seasonality has been widely documented for
common stocks and closed-end funds both in the USA and in other countries.
For example, Ritter (1988) and Haugen and Jorion (1996) document this return
seasonality in US stocks, Athanassakos (1992) shows this seasonality in
Canadian stocks, and Brauer and Chang (1990) documents that closed-end fund
prices increase in January.
The tax-loss-selling hypothesis explains that the January effect is due to
tax-loss-selling pressure from individual investors at the end of the year.
Taxable individual investors sell stocks that have declined in value to realize
capital losses in order to reduce taxes on realized capital gains or to offset a
limited amount of other income. Such selling results in a decline in prices at
year-end. This selling pressure abates immediately following the calendar turn
and results in an abnormally high return in January. The January effect,
therefore, reflects the wealth-maximizing behavior of individual investors at
the turn of the year. The window-dressing hypothesis, on the other hand,
argues that the year-end portfolio rebalancing of institutional investors rather
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The authors would like to thank two anonymous reviewers for their valuable comments. All
errors are entirely the authors' own.
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