The Information Content of Analysts' Forecasts of REIT Earnings

Abstract

In this study, we attempt to add some clarification to the ongoing debate of REITs. While REITs have some characteristics similar to those of common stocks, they behave fundamentally different from stocks in general. Using a matched sample comparison, we find that REITs have lower return variability and lower correlation to the market, but higher institutional participation than other firms. In tests of forecast unbiasedness, we observe significant levels of bias and inefficiency for both REITs and common stocks when we use traditional rational expectations models. Lastly, we examine the market reaction to earnings forecast revisions. All forecast revisions, for both REITs and stocks, have significant price reactions around the revision. These returns are magnified when the sample is divided into sub-categories based on the sign of the revision or whether the analyst simultaneously changed his investment recommendation. Furthermore, while forecast errors do have some explanatory power for returns around the revision date, the level is greater for stocks than for REITs.