1. The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions
July 6
ERES 2013, Vienna
Vivek Sah
University of San Diego

2. Introduction Equity market timing theory In context of REITs
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.

3. 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)

4. 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

5. Research hypothesis
Will privatization announcement lead to a contagion effect on other REITs?

6. 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

7. Literature review Lang and Stulz (1992) Erwin and Miller (1998)
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

8. 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

9. Data
REIT privatization data from January 1999 and December 2010 from SNL
CRSP database for REIT returns

10. Methodology Forbes and Rigobon (2002) Collins and Gavron (2005)
VAR model adopted
Collins and Gavron (2005)
Adjusted correlation coefficient

11. Privatization deals Year Deal Value ($M) # of Deals 2010 264.4 1 2008
438.0
2007
49,501.6 11
2006
58,041.2
2005
20,491.6 8
2004
2,643.1 3
2003
3,526.1
2002
927.4 2
2001
6,178.2 5
2000
5,400.0
1999
2,179.00
Total
149,590.6 51

12. Mean Abnormal Return for REITs Going Private
Results - Event study
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
7.19%
0.00* 1
8.70% 2
0.16% 3
-0.12%
0.27

13. Cumulative Abnormal Return for REITs Going Private
Contd…
Cumulative Abnormal Return for REITs Going Private
Days
CAR
p-value
(-2,2)
16.12%
0.00*
(-1,1)
16.13%
(0,1)
15.89%
(0,2)
16.06%
(0,3)
15.94%

14. 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

15. Event study – Matched Sample
Mean Abnormal Return for Matched REITs
Day
Mean Abnormal Return
p-value -3
0.09%
0.09*** -2
0.28%
0.28 -1
0.52%
0.00*
0.71% 1
0.54%
0.00 2
-0.17%
0.18 3
0.11%
0.27

16. Cumulative Abnormal Return for Matched REITs
Contd…
Cumulative Abnormal Return for Matched REITs
Days
CAR
p-value
(-2,2)
1.54%
0.00*
(-1,1)
1.82%
(0,1)
1.25%
(0,2)
1.08%
(0,3)
1.19%

17. 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

18. VAR Model and adjusted correlation coefficient
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)

19. 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’

20. Summary of results REIT Type Stable Turmoil Test Contagion ρ σ
Statistics
KPA
Hotel
0.87
0.00
0.79
0.97 N
COE
Office
0.74
0.22
3.53 C
GPT
0.78
0.43
4.05
GLB
0.93
0.85
2.03
AFR
0.33
0.49
-1.47
ASN
Multi-family
0.69
1.30
CPJ
Manufactured Home
0.96
0.58
5.84
RFS
0.80
5.35
AER
Shopping Center
0.14
0.27
-0.98

21. Conclusion and further analysis
Half of the sample display some contagion affect
No consensus
Testing characteristics of REITs which show contagion

22. Thank you