How Much Do Reits Pay for Their Ipos?

Posted: 12 Apr 2006

See all articles by Hsuan‐Chi Chen

Hsuan‐Chi Chen

University of New Mexico - Anderson School of Management

Chiuling Lu

Yuan Ze University - Department of Finance

Abstract

Previous studies have documented the reversal in the initial return of REIT IPOs from overpricing in the 1980s to underpricing in the 1990s. We find that the gross spreads of REIT IPOs decreased significantly in the 1990s. In particular, there is a bimodal clustering for gross spreads at 6.5% and 7.0%. Moreover, in the 1980s around 94% of REIT IPOs had integer offer prices, most of which were priced at either $10 or $20. However, the proportion of integer offer prices decreased to 64% in the 1990s. Higher gross spreads, overpricing, and high frequency of integer offer prices for REIT IPOs in the 1980s are consistent with the marketing hypothesis that in the 1980s REIT IPOs were mainly marketed to less-informed individual investors. Our results explain the dynamic process employed by underwriters in the setting of gross spreads and the pricing of REIT IPOs as a new financial product in response to various structural changes in REITs.

Keywords: REIT, IPO, underpricing, overpricing, gross spread

Suggested Citation

Chen, Hsuan-Chi and Lu, Chiuling, How Much Do Reits Pay for Their Ipos?. Journal of Real Estate Finance and Economics, Vol. 33, No. 2, 2006, Available at SSRN: https://ssrn.com/abstract=895331

Hsuan-Chi Chen (Contact Author)

University of New Mexico - Anderson School of Management ( email )

1924 Las Lomas NE
Albuquerque, NM 87131
United States

HOME PAGE: http://www.mgt.unm.edu/faculty/directoryArea.asp#FIN

Chiuling Lu

Yuan Ze University - Department of Finance ( email )

Chung-Li, Taoyuan 320
Taiwan

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