Abstract
We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust mergers. REITs enjoy tax-advantaged status if they conform to net income pay-out requirements. This unique feature results in limitations on management's ability to command free cash flows and to accumulate reserves for financing projects. One manifestation of this is that public-public REIT mergers are stock financed events. Because stock financing is expected, the signal that is sent by the choice of stock financing in conventional firms is cancelled for the case of REITs. This allows us to use REIT mergers as a control experiment to gain knowledge about mergers in the conventional corporate finance world. We find evidence that post-merger underperformance is related to a signal of asymmetric information sent by management's decision to use stock financing, and does not result from the structural implications of stock financing itself.
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