Abstract
We examine bid-ask spreads, depths, and adverse selection components of bid-ask spreads for REITs announcing dividend cuts or suspensions before, during, and after the 2008 financial crisis. We compare measures of spread, market depth, and adverse selection components of bid-ask spreads across time periods and between event and non-event REITs. We find that on announcement days of dividend cuts and suspensions, bid-ask spreads of event REITs are narrower and market depths are larger than that of non-event REITs during and after the financial crisis periods. These findings suggest improved liquidity of REIT shares on announcement days of dividend events. We do not find any significant change in adverse selection components of bid-ask spreads. Our results regarding improved liquidity during the financial crisis period are consistent with Calomiris and Wilson. Calomiris and Wilson report that during the capital crunch in the 1930s, banks facing wider bid-ask spreads used dividend cuts as a way to preserve capital to avoid selling equity in a low-liquidity or high-transaction cost environment (wider bid-ask spread).
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