vivek sah university of san diego
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The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions. July 6 ERES 2013, Vienna. Vivek Sah University of San Diego. Introduction. Equity market timing theory Issuing stocks at high prices & repurchasing at low prices In context of REITs - PowerPoint PPT PresentationTRANSCRIPT
Vivek Sah University of San Diego
The Intra-Industry Information Transfers: Contagion in REIT Privatization Transactions
July 6ERES 2013, Vienna
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Introduction• Equity market timing theory
– Issuing stocks at high prices & repurchasing at low prices
• In context of REITs– Sharp decline creates a unique buying opportunity
• REITs may trade well below their liquidation values
• A positive price change for REIT announcing going-private decision.
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Intra-Industry information transfers
• Propagation of unexpected shocks from a particular firm to the other firms in the same sectors
• Contagion – Information about one particular firm suggests the
same problem for the other firms (Lang and Stulz, 1992)
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Contagion
• Similarity between firms could be affected in the same direction by the same information
• Competitive effect may also exist – Exit from the public market of a firm will
increase the relative competitive position for the other firms in the same industry
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Research hypothesis
• Will privatization announcement lead to a contagion effect on other REITs?
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Motivations for the study• Independent REIT sector provides a setting to
examine contagion effect
• Contagion effect– In real estate market, properties are not frequently
traded– Portfolio value is not mark-to-market– Limited information is provided for participants to
evaluate the “true” market value
6
Literature review
• Lang and Stulz (1992)
– Negative impact on the portfolio value of competitors with the same SIC
• Erwin and Miller (1998)
– Rival firms experience a significant negative stock price reaction
• Laux, Starks and Yoon (1998)
– Dividend change announcement affects
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Contd…
• Ghosh, Guttery and Sirmans (1998)– REIT adversely affected by bad performance
announcement of financial institutions’ real estate portfolios
• Elliott, Highfield and Schaub (2006) – No contagion effect but modest competitive effect
for audit opinion announcements
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Data
• REIT privatization data from January 1999 and December 2010 from SNL
• CRSP database for REIT returns
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Methodology
• Forbes and Rigobon (2002)– VAR model adopted
• Collins and Gavron (2005)– Adjusted correlation coefficient
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Privatization deals
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Year Deal Value ($M) # of Deals
2010 264.4 1
2008 438.0 1
2007 49,501.6 11
2006 58,041.2 11
2005 20,491.6 8
2004 2,643.1 3
2003 3,526.1 3
2002 927.4 2
2001 6,178.2 5
2000 5,400.0 3
1999 2,179.00 3
Total 149,590.6 51
Results - Event study
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Mean Abnormal Return for REITs Going Private
Day Mean Abnormal Return p-value
-3-0.21% 0.14
-2-0.16% 0.20
-1-0.24% 0.11
07.19% 0.00*
18.70% 0.00*
20.16% 0.20
3-0.12% 0.27
Contd…
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Cumulative Abnormal Return for REITs Going Private
Days CAR p-value
(-2,2)16.12% 0.00*
(-1,1)16.13% 0.00*
(0,1)15.89% 0.00*
(0,2)16.06% 0.00*
(0,3)15.94% 0.00*
Matched sample for REITs• By size using market capitalization as the proxy
– REITs in the same property type
• Three portfolios based on market capitalization one-year before the announcement quarter
• REITs grouped into three portfolios based on liquidity one-year prior to the announcement quarter– Matched REITs to keep their REIT status in the next 2 years
after the sample REIT announcement date
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Event study – Matched Sample
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Mean Abnormal Return for Matched REITs
Day Mean Abnormal Return p-value
-30.09% 0.09***
-20.28% 0.28
-10.52% 0.00*
00.71% 0.00*
10.54% 0.00
2-0.17% 0.18
30.11% 0.27
Contd…
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Cumulative Abnormal Return for Matched REITs
Days CAR p-value
(-2,2)1.54% 0.00*
(-1,1)1.82% 0.00*
(0,1)1.25% 0.00*
(0,2)1.08% 0.00*
(0,3)1.19% 0.00*
Test for Presence of Contagion
• Significant increase in the correlation coefficient of the expected index returns
• Between the REIT and the Index from a ‘stable period’ prior to the event and a ‘turmoil period’ immediately following the event
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VAR Model and adjusted correlation coefficient
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tttt IndexLXLX )()(
'}, jt
itt xxX
1. VAR used to calculate the variance-covariance matrices during the stable period and turmoil period
• Forbes and Rigobon (2002)
2. Adjusted correlation coefficient is then calculated based on VAR variance-covariance matrices
• Collins and Gavron (2005)
Contd…
• Contagion represents an increase in co-movement between REIT returns.
• Significant increase in the correlation coefficient of the expected from a ‘stable period’ and a ‘turmoil period’
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Summary of results
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REIT Type Stable Turmoil Test Contagion
ρ σ ρ σ Statistics
KPA Hotel 0.87 0.00 0.79 0.00 0.97 N
COE Office 0.74 0.00 0.22 0.00 3.53 C
GPT Office 0.78 0.00 0.43 0.00 4.05 C
GLB Office 0.93 0.00 0.85 0.00 2.03 C
AFR Office 0.33 0.00 0.49 0.00 -1.47 N
ASN Multi-family 0.87 0.00 0.69 0.00 1.30 N
CPJ Manufactured Home 0.96 0.00 0.58 0.00 5.84 C
RFS Hotel 0.97 0.00 0.80 0.00 5.35 C
AER Shopping Center 0.14 0.00 0.27 0.00 -0.98 N
Conclusion and further analysis
• Half of the sample display some contagion affect– No consensus
• Testing characteristics of REITs which show contagion
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Thank you
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