Abstract
Because REITs distribute most taxable income to shareholders, internal liquidity is important for REIT investment decisions. We employ American REIT data to investigate the effects of internal liquidity risk on REIT excess returns. Our firm-level results show that internal liquidity risk positively relates to REIT excess returns when controlling for variables possibly affecting REIT returns. Besides, our results show that internal liquidity risk effects are stronger for REITs with smaller size and higher leverage ratio. We also find that an industry-wide internal liquidity risk state variable materially explains aggregated REIT excess returns when controlling for bond and equity market risk factors and other major state variables. We conclude that internal liquidity risk should be incorporated into REIT pricing.
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