Market discounts and shareholder benefits. Evidence from Australian REIT private placements
| DOI | https://doi.org/10.1108/JPIF-05-2014-0031 |
| Pages | 570-588 |
| Date | 26 August 2014 |
| Published date | 26 August 2014 |
| Author | Christopher Ratcliffe,Bill Dimovski |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Market discounts and
shareholder benefits
Evidence from Australian
REIT private placements
Christopher Ratcliffe
Faculty of Business and Law, Deakin University, Warrnambool, Australia, and
Bill Dimovski
Faculty of Business and Law, Deakin University, Geelong, Australia
Abstract
Purpose – The purpose of this paper is to examine the impacts of private placement announcements
by Australian Real Estate Investment Trusts (A-REITs)on existing shareholders. The study examines
96 A-REIT private placements from January 2000 to December 2012.
Design/methodology/approach – Utilisingevent study methodologythe authors examinethe impact
on existing shareholders wealth by measuring the abnormal returns (AR) around the placement
announcement. The authors extend the analysis to model the A-REITs ARs against a number of
explanatory variables to investigate the possible drivers for the observed event study results.
Findings – The results support the information signalling hypothesis, in that existing investors in
A-REITs earn negative and significant cumulative ARs of 1.3 per cent over the three-day event
window [1, þ1]. This result is in contrast to prior studies conducted on industrial firms, for
example; Hertzel and Smith (1993), Krishnamurthy et al. (2005) and Wruck and Wu (2009).
Practical implications – Regression analysis shows A-REITs trading at a premium to net
tangible assets and A-REITs that use placement funds for their core business have a positive impact
on announcement ARs.
Originality/value – This paper adds to the existing literature surrounding private placements and is
the first paper, to the authors’ knowledge, to examine the impact of Australian REITs.
Keywords Event study, Shareholders, Abnormal returns, A-REITs, Private placements,
Information signalling
Paper type Research paper
1. Introduction
The purpose of this study is to investigate the wealth effects to existing shareholders
during the issuing of private equity in the Australian Real Estate Investment Trust
(A-REIT) sector. We employ event study methodology on A-REIT private placements
from January 2000 to December 2012, to evaluate the potential direct costs and benefits
to existing shareholders by measuring abnormal and cumulative average abnormal
returns (AR) around the announcement of private placements. This study extends
on the research into A-REIT private placements by Dimovski and O’Neill (2012)
by examining a longer study period with an increased number of observations.
The current study also calculates the risk-adjusted returns to existing shareholders
around the announcement and importantly, it examines the possible drivers for the
observed excess returns by modelling the cumulative average ARs against a number of
explanatory variables.
To date, only one study has explicitly examined the wealth effects for REIT
shareholders following a private placement. Marciukaityte et al. (2007) examined US
REIT private placement announcements from 1981 to 1999. It is the aim of this study to
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received May 2014
Accepted June 2014
Journal of Property Investment &
Finance
Vol. 32 No. 6, 2014
pp. 570-588
rEmeraldGroup PublishingLimited
1463-578X
DOI 10.1108/JPIF-05-2014-0031
570
JPIF
32,6
add to the limited research in this area with a more up-to-date study period. This study
also includes a period of major structural cha nge in the A-REIT sector due to the
impacts of the global financial crisis. In addition, Australian Real Estate Investment
Trusts (A-REITs) need to pay out 100 per cent of their earnings in the form of
dividends to avoid punitive taxes, compared to 95 per cent for US REITs. This pay out
ratio may increase the reliance of A-REITs on the capital markets to raise funds.
Private placements are generally made to larger institutional investors such as
insurance companies, pension funds and investment banks (Parrino et al., 2012).
Placements provide a number of advantages over public issues, namely, they are
a relatively quick way of raising funds, the issuing firm does not need to provide
a disclosure document or prospectus. The offer price is likely to be higher than a public
offer due to the investors being institutional investors that are expected to be better
informed and thus need less incentive to purchase the shares on offer than the general
public. Finally, the shares can be selectively placed with investors that the board
see as supportive of the current management str ucture (Parrino et al., 2012).
However, existing shareholders often do not like private equity raisings due to
reduced proportional ownership and therefore voting power (Dimovski and O’Neill,
2012). To protect existing shareholders the Australian Securities Exchange (ASX)
listing rules 7.1 and 7.2 place a restriction on the number of shares that can be placed
privately without shareholder approval, cur rently 15 per cen t in any one year.
Prior research in this area has shown that private placements by conventional firms
have resulted in positive and significant ARs (Krishnamurthy et al., 2005; Wruck, 1989;
Wruck and Wu, 2009). Hertzel and Smith (1993) argue that the positive ARs are due to
the undervaluation hypothesis. The undervaluation hypothesis is derived from the
information signalling theory, which suggest that new equity issues by a firm conveys
new information to the market that managers believe the firm is overvalued (Myers
and Majluf, 1984). Myers and Majluf (1984) suggest that managers of undervalued
firms that have a positive NPV project, but lack financial slack, will elect not to issue
new equity if the portion of existing assets transferred to the new shareholders is
greater than the increase in firm va lue retained by existing shareholders, resulting in
managers forgoing a positive NPV project. However, the authors note that this problem
can be overcome if managers can costles sly convey their private information to
the market. Hertzel and Smith (1993) hypothesise that private placement of equity
can solve the undervaluation problem for managers and therefore avoid forgoing an
investment opportunity. It then follows that managers who use private placements
to finance projects are signalling to the market the firm is undervalued resulting in
positive ARs (Hertzel and Smith, 1993).
This study is the first to measure the ARs related to a private placement
announcement in the A-REIT sector. Prior research by Marciukaityte et al. (2007)
found, contrary to general industry studies, that existing shareholders of US REITs
earn negative and significant CARs of 0.82 per cent around the announcement
date. The authors suggest that this result is due to “REIT managers being able to time
the placements with hot equity markets and good rea l estate investment markets”
(Marciukaityte et al., 2007, p. 398), contradicting the undervaluation hypothesis of
Hertzel and Smith (1993) and supporting the infor mation signalling hypothesis.
An innovative feature of this study is that it will investigate the impact that the
global financial crisis may have had on the placement of private equity by A-REITs
and the impact for existing shareholders. Figure 1 shows that since the mid-1990s the
A-REIT sector has grown from a market capitalisation of approximately $10 billion to
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Market discounts
and shareholder
benefits
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