The Intra-Industry Information Transfers: Evidence Based on REIT Privatization

Abstract

Equity market timing theory suggests the practice of issuing stocks at high prices and repurchasing at low prices. According to the equity market timing theory, the sharp decline in REIT shares creates a unique buying opportunity as many high-quality REITs may trade well below their liquidation values. It basically suggests a positive price change for REIT announcing going-private decision. Research in intra-industry information transfers studies whether unexpected shocks from a particular firm are propagated to the other firms in the same sector. The proposition of contagion predicts that the information about one particular firm suggests the same problem for the other firms (Lang and Stulz(1992)). The rational is that due to the similarity between firms within the same industry, other firms could be affected in the same direction (i.e. the same direction of price changes) by the same information. REIT sector provides an interesting setting to examine contagion effect. In real estate market, properties are not frequently traded. Thus the portfolio value is not mark-to-market. Thus, we expect contagion effect exists in REIT market. Specifically, we expect a positive price change for other REITs. Besides contagion effect, competitive effect may also exist in the market. Relevant to this study, the proposition of competitive effect theory predicts that the exit of public market of one particular firm will increase the relative competitive position for the other firms in the same industry. Thus in association with contagion effect, we expect the price change magnitude might be even bigger for REITs focus on the same property type as REITs announcing privatization. The majority of the literature in this field is the study on contagion effect of financial institutions, within nation and among nations (Forbes and Rigobon(2002)). However, it has been argued that information transfer effect may be different due to various characteristics of different industry (Erwin and Miller(1998)). Lang and Stulz(1992) examine contagion effect from bankruptcy announcement. They find that bankruptcy announcement brings out a statistically negative impact on the portfolio value of competitors with the same Standard Industry Code (SIC). The negative impact is even significantly greater for highly-leveraged industries and for industries with highly correlated stock returns. Further, their study indicates that industries with high concentration, the effect tends to be positive.