The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs
David H. Downs
Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate; The Kornblau Institute
University of Central Florida
Gary A. Patterson
University of South Florida
April 18, 2011
Real Estate Economics, March 2012
This paper examines real estate investment trusts (REITs) to determine the correspondence between short interest and subsequent prices. The theoretical basis for our tests comes from the overvaluation conditions created by a combination of costly short selling and heterogeneous beliefs. This paper exploits the unique characteristics of REITS as they are similar with respect to high dividend payouts and differentiated by underlying real asset investments. An innovative aspect of the methodology involves partitioning firms based on investment focus as a proxy for transparency and as a determinant of heterogeneous beliefs regarding valuation. The findings (i) affirm the information content of REIT short interest and (ii) highlight the importance of investment focus in resolving the divergence in investor opinions of value. Overvaluation conditions exist among REITs with greater short interest and less transparency whereas such valuation conditions do not appear among transparent REITs, regardless of the level of short selling.
Keywords: REITs, Short Interest, Valuation, TransparencyAccepted Paper Series
Date posted: April 19, 2011
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