REIT Going Private Decisions

Abstract

Over the recent decade there was a wave of REITs going private, from an average of about three per year to forty between 2005 and 2007. Standard corporate finance theory posits that firms go private when there is no longer a positive tradeoff between the expected benefits and costs of being public, and provides empirical evidence that going private decisions are motivated by potential gains from leverage, tax benefits, and expected improvements in corporate governance. Given the unique institutional environment for the REIT industry, this paper sheds new light on the going-private decision. Specifically, we examine the determinants of the going-private decision and document announcement wealth changes using a sample of 160 REITs from 1985 to 2009. We find firm performance and agency-related factors significantly impact the probability that a REIT announces to go private. We find that the passage of Sarbanes-Oxley and a proxy for differential performance in the private and public markets have no significant impact on the decision. The announcement day abnormal return is almost 12% and the three-day abnormal return is 15%, magnitudes that are both statistically and economically significant. Variations in the market reaction are associated with lower levels of cash and higher stock price volatility. Overall, we document a new set of going-private factors and wealth impacts for the REIT industry that are unique from those of previous corporate finance literature.