Existing studies provide conflicting results regarding whether real estate investment trusts (REITs) effectively optimize and diversify institutional portfolios. Based on the style analysis of Sharpe, we extend Liang and McIntosh's study with a more complete set of asset classes over a longer sample period. We provide additional evidence suggesting that practicing analysts should include REITs as an asset class to optimize their portfolios. Specifically, our results show that the price behavior of REITs is unique and cannot be satisfactorily duplicated by combining equity, fixed‐income securities, and unsecuritized real estate. The time series of the styles on REITs indicates that it is difficult to ex ante produce returns on REITs without diversifying into REITs.
PurposeDuring the height of the financial/credit crisis of 2008, the US Internal Revenue Service issued temporary guidance that permits REITs (real estate investment trusts) to retain cash and pay "effective stock dividends" through 2009 to meet their income distribution requirement. The purpose of this study is to investigate the policy implications of this guidance on shareholders' wealth and the intra‐industry effects for non‐event, rival REITs when event REITs announced elective stock dividends.Design/methodology/approachThis study identified the announcements of the Revenue Procedures 2008‐68 and 2009‐15 and subsequent six equity REITs announcing the distribution of effective stock dividends in the first quarter of 2009. To assess their implications, this study adopted the event study methodology and multivariate regressions to examine the REIT price reactions and their distribution to the Revenue Procedure announcements and to the elective stock dividend announcements, respectively.FindingsThe Revenue Procedure announcements have positive wealth effects on the entire REIT market and REITs with higher leverage enjoy larger abnormal returns. During firm stock dividend announcement windows, non‐event, rival REITs have higher positive price reactions when the event firm and the non‐event firm are not alike and their returns have a low correlation coefficient, when the event firm has a large negative abnormal price reaction, and when the event firm pays cash/stock dividends in the mixture of 40 percent:60 percent, instead of 10 percent:90percent.Practical implicationsThe results will help REIT investors to make better decisions. This study produces important implications for investors to pick REITs which are likely to experience higher returns at periods of turmoil when announcements about dividend policy changes are expected.Originality/valueTo the best of the authors' knowledge, this is the first study looking into intra‐industry effects of REIT dividend announcements and the policy implications of the elective REIT stock dividends permitted by the US Internal Revenue Service. The results of this study show that the informational signals associated with these announcement events are rich and have intra‐industry implications on REIT share prices.
PurposeUS real estate investment trusts (REITs) typically distribute more dividends than required by tax regulations. This paper aims to focus on discretionary dividends, and examines the impact of information asymmetry on this excess component of dividends.Design/methodology/approachThis paper considers a set of US REITs with reported taxable income figures over the 2000‐2007 period, and employs regression analysis to examine the influence of information asymmetry on the excess component of dividends. The explained variable is specified as excess dividends scaled by total assets. Excess dividends are dividends paid over the mandatory dividend payments calculated with taxable income, instead before‐tax net income. Following the REIT studies of Hardin and Hill and Han, this study employs TobinQas the proxy for asymmetric information.FindingsContrary to Hardin and Hill's conclusion, but consistent with dividend signaling theory as well as agency cost explanations, the results indicate that REITs with higher level of asymmetric information pay out significantly more excess dividends. Nevertheless, in contrast to Deshmukh's study on manufacturing firms, the REIT results are against the prediction of the pecking order theory.Originality/valueThe paper is one of the few studies that explicitly examine the factors influencing REIT decision on discretionary dividends. Contrast to previous studies, this study is able to obtain taxable income and compute the discretionary dividends more accurately. Furthermore this paper is able to provide evidence against the pecking order theory, which is not investigated in the existing REIT dividend studies.
