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Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts

44 Pages Posted: 20 Nov 2007 Last revised: 28 Sep 2010

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Date Written: July 16, 2010

Abstract

While several studies have documented behavioral biases in the behavior of individual investors, very little is known about the existence of such biases in corporations. We utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of one of the most widely discussed biases, the disposition effect. Using property level REIT data, we find strong statistical evidence that REIT managers tend to sell winners and hold losers, where winners and losers are defined using changes in properties' prices since they were acquired. In addition, we find evidence that this behavior is consistent with the disposition effect. REIT managers are significantly less likely to sell properties that have a loss relative to a reference point based on inflation or historical average returns, controlling for the properties' recent returns. Management of corporations with greater tendencies toward disposition effect behavior tend to sell winner properties at lower prices, all else equal. We find no support for three alternative explanations, optimal tax timing, mean reverting property-level returns, and asymmetric information.

Keywords: Disposition effect, Behavioral corporate finance, REITs

JEL Classification: G31, L85

Suggested Citation

Crane, Alan D. and Hartzell, Jay C., Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts (July 16, 2010). Available at SSRN: https://ssrn.com/abstract=1031010 or http://dx.doi.org/10.2139/ssrn.1031010

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Jay C. Hartzell (Contact Author)

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

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