The Changing Asymmetric Information Component of REIT Spreads: A Study of Anticipated Announcements
Posted: 24 Sep 1999
This study examines the risk-compensating behavior of REIT market makers. The bid-ask spread is hypothesized to compensate market makers for three costs: asymmetric information, order processing, and inventory. As the market maker's perceived likelihood of transacting with a better informed individual increases (decreases), the percentage of the spread that is attributed to asymmetric information will increase (decrease). This study examines the asymmetric information components of the bid-ask spread immediately prior to and following REIT dividend announcements and REIT funds from operations announcements during 1995-1996. The asymmetric information component increases the day before and then declines subsequent to dividend announcements of small and equity REITs. Asymmetric information costs increase following funds from operations announcements.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation