Valuation Uncertainty, Institutional Involvement, and the Underpricing of Ipos: The Case of Reits

Abstract

Unlike operating company initial public offerings (IPOs), REIT IPOs in the 1970s and 1980s were initially overpriced and subsequently under performed other REIT securities in the 100 days after the initial issuance. In contrast, the equity REIT IPOs that have come to the market in the 1990s have been underpriced, on average, by 3.65%. Moreover, these recent REIT IPOs have moderately outperformed seasoned equity REITs in the 100 trading days after issuance. We attribute the initial-day underpricing of recent REITs to two factors. First, there is greater valuation uncertainty because the managers of most recent REIT IPOs have signaled their intentions to actively manage the REITs portfolio of properties. In contrast to the typical pre-1990 REIT IPO, most of the recent REIT offerings can be characterized as "management plays" rather than as passive conduits for investor's capital. Second, there is significantly more institutional involvement in the more recent REIT IPO market. Both of these factors make these issues more susceptible to the "winner's curse." Evidence consistent with these conjectures is presented.

JEL Classification: G14