Academic journal article The Journal of Real Estate Research

Who Follows REITs?

Academic journal article The Journal of Real Estate Research

Who Follows REITs?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

It is well documented that analyst following is associated with higher firm and real estate investment trust (REIT) value.1 Academic research also shows that investors value reports of analysts (e.g., Womack, 1996; Francis and Soffer, 1997; Asquith, Mikhail, and Au, 2005). However, not all research reports issued by analysts are equally informative. The characteristics of the investment bank that issues a research report matters. In light of the increased analyst following of REITs since the 1980s (e.g., Devos, Ong, and Spieler, 2007), it is surprising that the relation between investment bank characteristics and analyst coverage and the informativeness of analysts' reports has not been investigated for REITs. In particular, there are some important features which REITs exhibit that may help answer questions related to analyst behavior, not just about REITs, but generalizable to the broader population of firms. Simply stated, REITs form a research group that exhibits relatively low information asymmetry. REITs are relatively transparent in nature2 yet require frequent investment banking activities in order to access the capital market (note that the dividend distribution regulation faced by REITs severely limits the use of retained earnings3). In addition, given that REITs now constitute a regular staple in most investor portfolios, there may be a desire of brokerages that rely on trading commissions to follow REITs to generate income from investment recommendations. Therefore, REITs form a sample of firms with potential conflicts of interest but, by virtue of their transparent nature, may require less analyst coverage to produce information. These competing factors make REITs an interesting subsample for analysis. We contribute not only to the broader analyst behavior literature but also to a developing literature on the role of analysts following REITs (e.g., Devos, Ong, and Spieler, 2007, 2011; Downs and Güner, 2006; Baik, Billings, and Morton, 2008; Boudry, Kallberg, and Liu, 2011) by investigating a number of hypotheses surrounding two primary research questions.

The first primary research question we address is straightforward: Who follows REITs? Analysts that follow REITs play an important role in disseminating information, monitoring, and, possibly, marketing the REIT. It is important to document the identity of the investment banks that cover REITs given the increase in the number of analysts who follow REITs (which also may be a function of the increase in REITs listed on the U.S. stock markets) because different characteristics of investment banks have been shown to affect analyst behavior. This is crucial given that REITs behave differently from traditional stocks in terms of information production and transparency.4 These observations, in turn, have important implications for REITs because previous researchers have shown that asymmetric information is related to REIT underperformance (e.g., Wang, Erickson, Gau, and Chan, 1995). Collectively, it remains an open question as to whether REITs are followed by a different subset of analysts who also follow other industries.

Formally, we develop hypotheses around the first primary question where we test whether REITs are likely to be followed by equity underwriters in order to generate underwriting business (''underwriting hypothesis''), brokerage firms to generate trade commissions (''trade generation hypothesis''), or independent research houses (''independent following hypothesis''). Because REITs cannot accumulate taxable income as retained earnings, they may have a greater reliance on those that offer or play a role in underwriting services. The underwriting hypothesis maintains that full-service banks and syndicate banks have an incentive to issue recommendations for banks because they compete for REITs' underwriting business. The premise of the trade generation hypothesis is that brokerage firms have an incentive to issue recommendations for firms that their clients want in their portfolios to generate the most commissions. …

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