Asset Growth and Stock Performance: Evidence from REITs

Abstract

In this paper, we examine the impact of asset growth rates on the future stock performance of 308 publicly traded real estate investment trusts (REITs). We observe that fast growing REITs tend to underperform slow growing REITs. However, we find evidence that the growth effect is significantly less negative for REITs selling at a premium to NAV. On the asset investment side, the negative asset growth effect is associated with growth in non-core assets. This is consistent with the notion that firms that grow outside of their competency areas are penalized by the market. On the asset financing side, we find that growth activities funded by taking on more unsecured debt are associated with negative stock performance over the next 12 months. In addition, we only observe the asset growth effect in the sub-sample of REITs that engages in equity issuance over the next 12 months. The combined evidence suggests that contemporaneous equity dilution, which has not been considered in previous studies, may provide a simple explanation for the underperformance of fast growing firms.

Keywords: REITs, asset growth, pricing anomaly