The Performance of Acquisitions in the Real Estate Investment Trust Industry

By Sahin, Olgun F. | The Journal of Real Estate Research, July-September 2005 | Go to article overview

The Performance of Acquisitions in the Real Estate Investment Trust Industry


Sahin, Olgun F., The Journal of Real Estate Research


Abstract

This study examines the performance of acquisitions in the Real Estate Investment Trust (REIT) industry around the acquisition announcement and in the long-run. The results suggest that the acquiring REITs experience statistically significant negative abnormal returns while the target REITs earn statistically significant positive abnormal returns during the three-day period around the announcement. The long-run performance of the acquiring REITs is analyzed using size benchmark portfolios with the buy-and-hold, cumulative average and mean calendar time abnormal returns, as well as the Fama-French Three Factor Model. None of the other methods detect significant abnormal returns in the long-run with the exception of the buy-and-hold abnormal return. Further analysis shows that the long-run positive buy-and-hold abnormal return is consistent with an unexpected decline in cost of equity after acquisitions.

Introduction

The Real Estate Investment Trust (REIT) industry experienced relatively significant consolidation activity during 1990s. These acquisitions raise questions on the wealth effects in the short- and long-run for shareholders. Generally, firms make acquisitions for several reasons, such as market power, synergies in operations, removal of inefficient management, reduction of bankruptcy costs and tax loss benefits. The findings of previous studies suggest that the acquiring firm shareholders experience non-significant abnormal returns, while target shareholders earn significant positive abnormal returns around acquisition announcements. The long-run performance of the acquiring firms is not resolved. Early studies identify significantly negative abnormal returns to acquiring firms, although recent research points out problems associated with risk adjustment methods and biases in test statistics.

This study examines the performance of REITs involved in acquisitions around the announcement and during a three-year period after the announcement. The market reaction to acquisition announcements reflects the market's assessment of acquisitions. The adjustment resulting from acquisition announcements in an efficient market takes place quickly, allowing no abnormal performance in the long-run or gradual adjustments over time. Therefore, the short-run analysis reflects the market's view about acquisitions while the long-run analysis has implications regarding market efficiency.

The sample includes thirty-five acquisition transactions among REITs between 1994 and 1998. The market model and the market-adjusted return are used to estimate the announcement period abnormal returns. The results suggest that the acquiring REITs experience statistically significant negative abnormal returns while the target REITs earn statistically significant positive abnormal returns during the three-day period around the announcement.

There are studies that examine the announcement period abnormal returns. However, the long-run performance of acquiring REITs has not been documented. In this study, the performance of an acquiring REIT is compared to a benchmark portfolio based on firm sizes measured by the market value of equity. The study utilizes four methods of abnormal return calculations after acquisitions: the Cumulative Average Abnormal Return (CAAR), the Buy-and-Hold Abnormal Return (BHAR), the Mean Calendar-Time Abnormal Return (MCTAR) and the Fama-French Three Factor Model. No method detects significant abnormal returns in the long-run with the exception of the BHAR. The study also examines changes in cost of equity for acquiring REITs after the event. The findings suggest that the long-run positive buy-and-hold abnormal return is consistent with an unexpected decline in cost of equity after acquisitions.

Literature Review and Hypotheses

Allen and Sirmans (1987) examine the performance of thirty-eight successful acquisitions among REITs over the 1977-1983 period. The sample acquisitions are collected from Moody's Bank and Finance Manual.

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