Investor Inattention to Earnings Surprises: Evidence from REIT and Tenant Information Transmission

Abstract

This paper investigates the equity Real Estate Investment Trust (REIT) shareholder response to tenant earnings announcements (EA). We find that while REIT investors respond to tenant EA, their response is focused on negative earnings surprises. Tenant EAs provide an ideal setting to test whether REIT investors overreact to imprecise signals (moderated confidence hypothesis) or underreact to material news (limited attention hypothesis). Contrary to the findings in the customer-supplier literature, we find that REIT investors pay limited attention to their large tenant’s negative earnings surprises. REIT shareholders do not fully incorporate the tenant earnings news at the time of the announcement, particularly when the tenant is more economically important to the REIT. These results shed further light on both the importance of the tenant-landlord relationship and the limited attention bias documented in the REIT literature.