Vivek Sah University of San Diego

The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions

July 6ERES 2013, Vienna

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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.

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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)

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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

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Research hypothesis

• Will privatization announcement lead to a contagion effect on other REITs?

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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

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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

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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

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Data

• REIT privatization data from January 1999 and December 2010 from SNL

• CRSP database for REIT returns

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Methodology

• Forbes and Rigobon (2002)– VAR model adopted

• Collins and Gavron (2005)– Adjusted correlation coefficient

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Privatization deals

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Year Deal Value ($M) # of Deals

2010 264.4 1

2008 438.0 1

2007 49,501.6 11

2006 58,041.2 11

2005 20,491.6 8

2004 2,643.1 3

2003 3,526.1 3

2002 927.4 2

2001 6,178.2 5

2000 5,400.0 3

1999 2,179.00 3

Total 149,590.6 51

Results - Event study

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Mean Abnormal Return for REITs Going Private

Day Mean Abnormal Return p-value

-3-0.21% 0.14

-2-0.16% 0.20

-1-0.24% 0.11

07.19% 0.00*

18.70% 0.00*

20.16% 0.20

3-0.12% 0.27

Contd…

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Cumulative Abnormal Return for REITs Going Private

Days CAR p-value

(-2,2)16.12% 0.00*

(-1,1)16.13% 0.00*

(0,1)15.89% 0.00*

(0,2)16.06% 0.00*

(0,3)15.94% 0.00*

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

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Event study – Matched Sample

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Mean Abnormal Return for Matched REITs

Day Mean Abnormal Return p-value

-30.09% 0.09***

-20.28% 0.28

-10.52% 0.00*

00.71% 0.00*

10.54% 0.00

2-0.17% 0.18

30.11% 0.27

Contd…

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Cumulative Abnormal Return for Matched REITs

Days CAR p-value

(-2,2)1.54% 0.00*

(-1,1)1.82% 0.00*

(0,1)1.25% 0.00*

(0,2)1.08% 0.00*

(0,3)1.19% 0.00*

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

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VAR Model and adjusted correlation coefficient

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tttt IndexLXLX )()(

'}, jt

itt xxX

1. 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)

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’

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Summary of results

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REIT Type Stable Turmoil Test Contagion

ρ σ ρ σ Statistics

KPA Hotel 0.87 0.00 0.79 0.00 0.97 N

COE Office 0.74 0.00 0.22 0.00 3.53 C

GPT Office 0.78 0.00 0.43 0.00 4.05 C

GLB Office 0.93 0.00 0.85 0.00 2.03 C

AFR Office 0.33 0.00 0.49 0.00 -1.47 N

ASN Multi-family 0.87 0.00 0.69 0.00 1.30 N

CPJ Manufactured Home 0.96 0.00 0.58 0.00 5.84 C

RFS Hotel 0.97 0.00 0.80 0.00 5.35 C

AER Shopping Center 0.14 0.00 0.27 0.00 -0.98 N

Conclusion and further analysis

• Half of the sample display some contagion affect– No consensus

• Testing characteristics of REITs which show contagion

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Thank you

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