Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts

Abstract

While several studies have documented behavioral biases in the behavior of individual investors, very little is known about the existence of such biases in corporations. We utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of one of the most widely discussed biases, the disposition effect. Using property level REIT data, we find strong statistical evidence that REIT managers tend to sell winners and hold losers, where winners and losers are defined using changes in properties' prices since they were acquired. In addition, we find evidence that this behavior is consistent with the disposition effect. REIT managers are significantly less likely to sell properties that have a loss relative to a reference point based on inflation or historical average returns, controlling for the properties' recent returns. Management of corporations with greater tendencies toward disposition effect behavior tend to sell winner properties at lower prices, all else equal. We find no support for three alternative explanations, optimal tax timing, mean reverting property-level returns, and asymmetric information.