Do Stock Prices Really Reflect Fundamental Values? The Case of Reits

39 Pages Posted: 27 Oct 2004 Last revised: 26 Aug 2010

See all articles by William M. Gentry

William M. Gentry

Williams College - Department of Economics

Charles M. Jones

Columbia Business School

Christopher J. Mayer

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: October 2004

Abstract

Real estate investment trust (REIT) stock prices deviate substantially from net asset values (NAV). Using REIT data since 1990, we find large positive excess returns to a strategy of buying stocks that trade at a discount to NAV, and shorting stocks trading at a premium to NAV. Estimated alphas from this strategy are between 0.9% and 1.8% per month, with little risk. Trading costs and short-sale constraints are not prohibitive and the results strengthen when we control for differences in liquidity or the extent of institutional ownership. We find that some variation in P/NAV makes sense, as premiums are positively related to recent and future NAV growth. However, there appears to be too much volatility in P/NAV, giving rise to potential profits from short-term mean reversion. The closed-end fund literature has some similar findings on stock price deviations from fundamental value, but compared to closed-end funds REITs are much larger and have much higher insider and institutional ownership. These differences suggest that REIT premiums and discounts reflect more than just small investor sentiment, which is a common explanation of why closed-end fund prices deviate from their fundamental value.

Suggested Citation

Gentry, William M. and Jones, Charles M. and Mayer, Christopher J., Do Stock Prices Really Reflect Fundamental Values? The Case of Reits (October 2004). NBER Working Paper No. w10850. Available at SSRN: https://ssrn.com/abstract=611362

William M. Gentry

Williams College - Department of Economics ( email )

Fernald House
Williamstown, MA 01267
United States
413-597-4257 (Phone)
413-597-4045 (Fax)

Charles M. Jones

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Christopher J. Mayer (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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