Long-term event study of timber real estate investment trust conversions

Abstract

The long-term financial performance of four timber real estate investment trust (REIT) conversions in the United States is evaluated by an event study with one-, two-, and three-year event windows. Three types of benchmarks are used in gauging the abnormal returns. The first benchmark is a portfolio of firms that are closest in size and book-to-market ratio to the timber REITs, the second is a portfolio of pre-conversion timber firms, and the third is an equal-weighted timber exchange traded fund (ETF) comprised of selected forest firms. Four approaches are used to calculate abnormal returns. Buy-and-hold abnormal returns and cumulative abnormal returns measure the preliminary abnormal returns, zero-investment portfolio approach with rolling regression evaluates the market-based risk premiums, and panel data analyses capture the relative advantages of REITs over their competitors within the timber industry. On average, annualized abnormal returns of 0.5% and 8.9% are identified before and after the REIT conversions. There is no difference between variances of pre- and post-event annualized abnormal returns. Therefore, structural changes have added values to the timber firms in the long run.