Another piece of the puzzle: REIT IPO underpricing after the financial crisis

Purpose – The purpose of this paper is to investigate the underpricing of real estate investment trust
(REIT) initial public offerings (IPOs) from January 2010 to June 2015, as the sector recovered from the global
financial crisis.
Design/methodology/approach – This study analyses the first day returns of US REIT IPOs in the post
financial crisis period. The study then employs regression analysis to examine the factors that influence
IPO underpricing.
Findings – The study observes that underpricing, on average, is not significantly different to zero.
Furthermore, the REIT IPOs examined display underperformance in the longer term. In contrast to the earlier
data samples of Chen and Lu (2006), the authors do not find that underwriting costs are a direct substitute for
the indirect cost of underpricing, instead the authors find that higher underwriting costs are associated with
higher underpricing. Also in contrast to the mainstream underpricing literature, the data suggest larger
capital raisings require higher underpricing. The authors also find that newly listed REITs provided
significant excess dividend returns over the post-listing period.
Practical implications – For institutional and retail investors, the results will help to further inform
investment opportunities in REIT IPOs.
Originality/value – This paper adds to the ongoing academic debate of the lack of underpricing in
REIT IPOs relative to industrial companies. Research has shown periods of underpricing are often
replaced with periods of overpricing suggesting that the pattern of behavior in REIT markets is
substantially different.