This paper builds a model to provide a complementary explanation to the well-known IPO pricing pu... more This paper builds a model to provide a complementary explanation to the well-known IPO pricing puzzle. Unlike existing theories in the field, our model does not assume that one agent (issuer, underwriter, informed investor, or uninformed investor) has superior information over another, nor that the pricing (or allocation) process is a tool for extracting information from the agent with superior information. We also pay no attention to the interactions between issuers and underwriters or to the investor sentiment (or underwriter activities) in the aftermarket. Instead, we allow the investor to make a decision on whether and when she should gather information (at a cost), and allow her to make a purchase decision based on the information she has gathered. With this investor's decision-making process in mind, firms price their IPOs to maximize their payoffs by trying to avoid an IPO failure (which is assumed to be costly to the firm) and by assessing the investor's possible post-search outcomes. While our model provides implications to the general IPO puzzle, the results seem particularly relevant for explaining the pricing of Real Estate Investment Trust (REIT) IPOs, Master Limited Partnership (MLP) IPOs, and mutual fund IPOs (for which the current theories fail to provide an adequate explanation). Our model may also help explain why IPO underpricing levels change over time and suggest that underpricing levels might vary across industries.
... The developer's optimization p (q). p problem for offering an acceptable presale deal is... more ... The developer's optimization p (q). p problem for offering an acceptable presale deal is, therefore: z E() max p qd (˜z) presale p z {p ,q} p z 1 [dp q (a ˜z bq)q]d (˜z) p z (1 i) cq K, (9) ... For this option, the developer will solve: z 1 E() max p cqd (˜z), spot n n z (1 i) {q } n (10) ...
We investigate share price responses to announcements of 93 business alliances using minority equ... more We investigate share price responses to announcements of 93 business alliances using minority equity purchases to bond the agreements. On average, selling firms realize significant increases in share value while buying firms garner neutral share price responses. Analysis of financial performance reveals that the buying firms tend to perform above average among their industry peers, while the sellers tend to perform on par with industry norms. Examination of the cross-sectional variation in share price responses revealed that insider ownership is positively correlated with abnormal returns for sellers only where insider holdings exceed 25% of outstanding shares. For buyers, however, abnormal returns increase with increased ownership concentration up to 5%, but decrease as ownership concentration increases from 5% upward. Finally, a third of the alliances in our sample made significant changes in the terms of the agreement during the three years following the formation of the alliance (e.g. strengthening or extending the agreement, reducing the scope of the agreement, or terminating the agreement).
The book provides the investing public, real estates practitioners, regulators, and real estate a... more The book provides the investing public, real estates practitioners, regulators, and real estate and finance academics with up-to-date information on what modern scholarly research tells us about Real Estate Investment Trusts (REITs). REITs are credited to allow institutional and individual investors to invest in real estate via a corporate entity. The increasing interest in REITs as indicated by their growth in market capitalisation and institutional holdings in the United States and around the world suggests that REITs are becoming an increasingly important part of investors' diversified portfolio.
We examine the benefits for firms participating in collaborations funded via minority equity plac... more We examine the benefits for firms participating in collaborations funded via minority equity placements. Selling firms, on average, realize significant increases in share value – strongly correlated with the size of the equity stake, its beta, and the relatedness of the two firms (by industry). Shares of purchasing firms, though, show neutral responses on average (but positive response for R&D intensive alliances). Further, purchasing firms have better financial performance than their industry peers in the years surrounding the announcement (suggesting, unlike joint ventures, that poor performance is not their motivation). Selling firms, however, may be motivated by poor operating performance.
Strategic alliances and joint ventures (hereafter referred to simply as alliances) bring together... more Strategic alliances and joint ventures (hereafter referred to simply as alliances) bring together otherwise independent firms to share resources in product design, production, marketing, and/or distribution. Forging an alliance enables a firm to focus resources on its core skills and competencies while acquiring other components or capabilities it lacks from the marketplace. These alliances and the network organizations they create are becoming increasingly important as competitive pressures force firms to adopt flexible and more focused organizational structures.
86 Wang, Erickson, Gau and Chan appraisal process that results in a higher variance in the apprai... more 86 Wang, Erickson, Gau and Chan appraisal process that results in a higher variance in the appraisal return series. Whether the appraisal process assumed by Geltner (or others) resembles the pro-cess appraisers use in the day-to-day appraisal assignments is still open for de-bate ...
In contrast with numerous studies that find significant underpricing for initial public offerings... more In contrast with numerous studies that find significant underpricing for initial public offerings of industrial firms, we document a statistically significant average return of-2.82% on the first trading day for a sample of 87 initial public offerings of real estate investment trusts during the 1971-1988 period. Qur overpricing result is invariant to offer price, issue size, distribution method, offer period, and underwriter reputation. Newly issued REITs, on average, substantially underperfoml a matching sample of seasoned REITs during the first 190 trading days. Interestingly, buyers of overpriced REITs are predominantly individual or non-13(f) institutional investors.
Share-price responses to Y5 announcements of increased research and development (R&D) spending ar... more Share-price responses to Y5 announcements of increased research and development (R&D) spending are significantly positive on average. even uhen the announcement occurs in the face of an earnings decline. High-technology firms that announce increases in R&D spending experience posmve abnormal returns on average, whereas announcements by low-technology firms are associated with negative abnormal returns. Further. in our cross-sectional analyses we find that higher R&D intensity than the industry average leads to larger stock-price increases only for firms in high-technology industries.
We analyze 483 entry and 439 exit events of publicly traded real estate investment trusts (REITs)... more We analyze 483 entry and 439 exit events of publicly traded real estate investment trusts (REITs) and find that changes in the number of REITs in the market affect rival REITs’ stock performance. We also partition the sample by the modes of entries and exits as well as by REIT asset type in order to disentangle alternative explanations. Overall, our evidence indicates that the supply effect still matters for stock prices even after considering signaling and price pressure explanations.
Ko Wang Faculty of Business Administration, The Chinese University of Hong Kong or [email protected]... more Ko Wang Faculty of Business Administration, The Chinese University of Hong Kong or [email protected], and Department of Finance, California State University-Fullerton. ... Yuqing Zhou Department of Finance, The Chinese University of Hong Kong or [email protected]. ...
The organizational structure and the financial performance of REITs (real estate investment trust... more The organizational structure and the financial performance of REITs (real estate investment trusts) have been examined extensively. Because of the unique tax rules required for REITS to maintain tax-exempt status, research on REITs potentially provides more insight into issues related to corporate mergers, dividend policy, capital structure, agency problems, and real estate returns. Among the studies that use REITs, one of the most common (and perhaps the most interesting) observations is that REIT stocks behave differently from the stock market in general. Allen and Sirmans' (1987) study is the first to use the unique characteristics of REITs to examine corporate finance issues. They find that, in corporate mergers, acquiring REITs experience significant wealth increases, while acquiring industrial firms do not. Howe and Shilling (1988) report a significant positive stock market response to REIT debt offering announcements, while the market responds differently to debt offerings by industrial firms. Wang et al. (1992) document that, although industrial-firm IPOs are on average underpriced (approximately 16.4%), REIT IPOs during the 1971-1988 period are significantly overpriced (the initial day return is equal to ǁ2.82%). 1 Colwell and Park (1990) report a reverse-size effect for REIT returns in a significant number of months during the year. Although several reasons have been offered to explain these anomalies, the possibility that the REIT stock market is unique cannot be ruled out. 2
It has been documented that institutional investors did not participate actively in the real esta... more It has been documented that institutional investors did not participate actively in the real estate investment trust (REIT) stock market prior to 1990 and that the percentage of institutional holdings of a REIT stock is positively correlated with the performance of the REIT stock. This article documents a reversal in trend in institutional investors' preference for investing in REIT stocks and in other stocks. The study shows that prior to 1990, institutional investors invested more of their funds in other stocks than in REITs, whereas after 1990 they invest more of their funds in REITs than in other stocks in the market. The strategies of institutional investors investing in REITs are also analyzed. The findings of the study have implications for the agency and corporate control issues prevailing in the REIT stock market.
It is well documented that REITs in the 1990s had experienced significant changes in their struct... more It is well documented that REITs in the 1990s had experienced significant changes in their structure and attracted greater institutional participation. This paper finds that REIT stocks with higher institutional holdings perform better on Monday than REITs with lower institutional holdings during the 1990s, but not in the 1980s. Furthermore, REITs that went public in the 1990s are the ones associated with the shift in the Monday return pattern. Our study supports the claim that the change in REIT structure and the increase in institutional participation in the REIT market in the 1990s make REIT stocks behave more like other equities in the stock market.
The Journal of Financial and Quantitative Analysis, 1995
We investigate the stock market reaction to 447 announcements of business relocation decisions in... more We investigate the stock market reaction to 447 announcements of business relocation decisions in the 1978-1990 period. We find that the stock market reaction to such decisions is tied to the motive for the relocation and the implied prospects for the firm, with the type of facility being relocated playing an insignificant role. Our finding reconciles several results in the literature concemmg the stock market reaction to announcements of capital investment decisions.
In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable i... more In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable interest rate for a construction loan. This mutually acceptable interest rate is the rate that makes a developer indifferent between using 100% equity financing and a construction loan. It is also the highest interest rate that a developer is willing to pay and a bank is willing to lend. The three risk factors identified in the model are the loss, leverage and first-phase loan ratios. Our analytical and numerical analyses indicate that the derived mutually acceptable interest rate has desirable properties as the rate increases with an increase in the three identified risk factors.
This study examines the impact of intra-project externalities and layout variables on the selling... more This study examines the impact of intra-project externalities and layout variables on the selling prices of 897 condominium units in the cities of Irvine and Santa Ana in Orange County, California. It documents that, at a micro-level, proximity to intraproject externalities such as greenspace, swimming pools, recreational areas, traffic noise, and the like, and project layout variables representing the location of individual condominium units within multiunit structures, have significant effects on the property values of units within a condominium project. The results indicate that, when cost is not prohibitive, both appraisers and underwriters should take intra-project externalities and layout variables into consideration when estimating property values or underwriting residential mortgages for condominium properties.
This paper builds a model to provide a complementary explanation to the well-known IPO pricing pu... more This paper builds a model to provide a complementary explanation to the well-known IPO pricing puzzle. Unlike existing theories in the field, our model does not assume that one agent (issuer, underwriter, informed investor, or uninformed investor) has superior information over another, nor that the pricing (or allocation) process is a tool for extracting information from the agent with superior information. We also pay no attention to the interactions between issuers and underwriters or to the investor sentiment (or underwriter activities) in the aftermarket. Instead, we allow the investor to make a decision on whether and when she should gather information (at a cost), and allow her to make a purchase decision based on the information she has gathered. With this investor's decision-making process in mind, firms price their IPOs to maximize their payoffs by trying to avoid an IPO failure (which is assumed to be costly to the firm) and by assessing the investor's possible post-search outcomes. While our model provides implications to the general IPO puzzle, the results seem particularly relevant for explaining the pricing of Real Estate Investment Trust (REIT) IPOs, Master Limited Partnership (MLP) IPOs, and mutual fund IPOs (for which the current theories fail to provide an adequate explanation). Our model may also help explain why IPO underpricing levels change over time and suggest that underpricing levels might vary across industries.
... The developer's optimization p (q). p problem for offering an acceptable presale deal is... more ... The developer's optimization p (q). p problem for offering an acceptable presale deal is, therefore: z E() max p qd (˜z) presale p z {p ,q} p z 1 [dp q (a ˜z bq)q]d (˜z) p z (1 i) cq K, (9) ... For this option, the developer will solve: z 1 E() max p cqd (˜z), spot n n z (1 i) {q } n (10) ...
We investigate share price responses to announcements of 93 business alliances using minority equ... more We investigate share price responses to announcements of 93 business alliances using minority equity purchases to bond the agreements. On average, selling firms realize significant increases in share value while buying firms garner neutral share price responses. Analysis of financial performance reveals that the buying firms tend to perform above average among their industry peers, while the sellers tend to perform on par with industry norms. Examination of the cross-sectional variation in share price responses revealed that insider ownership is positively correlated with abnormal returns for sellers only where insider holdings exceed 25% of outstanding shares. For buyers, however, abnormal returns increase with increased ownership concentration up to 5%, but decrease as ownership concentration increases from 5% upward. Finally, a third of the alliances in our sample made significant changes in the terms of the agreement during the three years following the formation of the alliance (e.g. strengthening or extending the agreement, reducing the scope of the agreement, or terminating the agreement).
The book provides the investing public, real estates practitioners, regulators, and real estate a... more The book provides the investing public, real estates practitioners, regulators, and real estate and finance academics with up-to-date information on what modern scholarly research tells us about Real Estate Investment Trusts (REITs). REITs are credited to allow institutional and individual investors to invest in real estate via a corporate entity. The increasing interest in REITs as indicated by their growth in market capitalisation and institutional holdings in the United States and around the world suggests that REITs are becoming an increasingly important part of investors' diversified portfolio.
We examine the benefits for firms participating in collaborations funded via minority equity plac... more We examine the benefits for firms participating in collaborations funded via minority equity placements. Selling firms, on average, realize significant increases in share value – strongly correlated with the size of the equity stake, its beta, and the relatedness of the two firms (by industry). Shares of purchasing firms, though, show neutral responses on average (but positive response for R&D intensive alliances). Further, purchasing firms have better financial performance than their industry peers in the years surrounding the announcement (suggesting, unlike joint ventures, that poor performance is not their motivation). Selling firms, however, may be motivated by poor operating performance.
Strategic alliances and joint ventures (hereafter referred to simply as alliances) bring together... more Strategic alliances and joint ventures (hereafter referred to simply as alliances) bring together otherwise independent firms to share resources in product design, production, marketing, and/or distribution. Forging an alliance enables a firm to focus resources on its core skills and competencies while acquiring other components or capabilities it lacks from the marketplace. These alliances and the network organizations they create are becoming increasingly important as competitive pressures force firms to adopt flexible and more focused organizational structures.
86 Wang, Erickson, Gau and Chan appraisal process that results in a higher variance in the apprai... more 86 Wang, Erickson, Gau and Chan appraisal process that results in a higher variance in the appraisal return series. Whether the appraisal process assumed by Geltner (or others) resembles the pro-cess appraisers use in the day-to-day appraisal assignments is still open for de-bate ...
In contrast with numerous studies that find significant underpricing for initial public offerings... more In contrast with numerous studies that find significant underpricing for initial public offerings of industrial firms, we document a statistically significant average return of-2.82% on the first trading day for a sample of 87 initial public offerings of real estate investment trusts during the 1971-1988 period. Qur overpricing result is invariant to offer price, issue size, distribution method, offer period, and underwriter reputation. Newly issued REITs, on average, substantially underperfoml a matching sample of seasoned REITs during the first 190 trading days. Interestingly, buyers of overpriced REITs are predominantly individual or non-13(f) institutional investors.
Share-price responses to Y5 announcements of increased research and development (R&D) spending ar... more Share-price responses to Y5 announcements of increased research and development (R&D) spending are significantly positive on average. even uhen the announcement occurs in the face of an earnings decline. High-technology firms that announce increases in R&D spending experience posmve abnormal returns on average, whereas announcements by low-technology firms are associated with negative abnormal returns. Further. in our cross-sectional analyses we find that higher R&D intensity than the industry average leads to larger stock-price increases only for firms in high-technology industries.
We analyze 483 entry and 439 exit events of publicly traded real estate investment trusts (REITs)... more We analyze 483 entry and 439 exit events of publicly traded real estate investment trusts (REITs) and find that changes in the number of REITs in the market affect rival REITs’ stock performance. We also partition the sample by the modes of entries and exits as well as by REIT asset type in order to disentangle alternative explanations. Overall, our evidence indicates that the supply effect still matters for stock prices even after considering signaling and price pressure explanations.
Ko Wang Faculty of Business Administration, The Chinese University of Hong Kong or [email protected]... more Ko Wang Faculty of Business Administration, The Chinese University of Hong Kong or [email protected], and Department of Finance, California State University-Fullerton. ... Yuqing Zhou Department of Finance, The Chinese University of Hong Kong or [email protected]. ...
The organizational structure and the financial performance of REITs (real estate investment trust... more The organizational structure and the financial performance of REITs (real estate investment trusts) have been examined extensively. Because of the unique tax rules required for REITS to maintain tax-exempt status, research on REITs potentially provides more insight into issues related to corporate mergers, dividend policy, capital structure, agency problems, and real estate returns. Among the studies that use REITs, one of the most common (and perhaps the most interesting) observations is that REIT stocks behave differently from the stock market in general. Allen and Sirmans' (1987) study is the first to use the unique characteristics of REITs to examine corporate finance issues. They find that, in corporate mergers, acquiring REITs experience significant wealth increases, while acquiring industrial firms do not. Howe and Shilling (1988) report a significant positive stock market response to REIT debt offering announcements, while the market responds differently to debt offerings by industrial firms. Wang et al. (1992) document that, although industrial-firm IPOs are on average underpriced (approximately 16.4%), REIT IPOs during the 1971-1988 period are significantly overpriced (the initial day return is equal to ǁ2.82%). 1 Colwell and Park (1990) report a reverse-size effect for REIT returns in a significant number of months during the year. Although several reasons have been offered to explain these anomalies, the possibility that the REIT stock market is unique cannot be ruled out. 2
It has been documented that institutional investors did not participate actively in the real esta... more It has been documented that institutional investors did not participate actively in the real estate investment trust (REIT) stock market prior to 1990 and that the percentage of institutional holdings of a REIT stock is positively correlated with the performance of the REIT stock. This article documents a reversal in trend in institutional investors' preference for investing in REIT stocks and in other stocks. The study shows that prior to 1990, institutional investors invested more of their funds in other stocks than in REITs, whereas after 1990 they invest more of their funds in REITs than in other stocks in the market. The strategies of institutional investors investing in REITs are also analyzed. The findings of the study have implications for the agency and corporate control issues prevailing in the REIT stock market.
It is well documented that REITs in the 1990s had experienced significant changes in their struct... more It is well documented that REITs in the 1990s had experienced significant changes in their structure and attracted greater institutional participation. This paper finds that REIT stocks with higher institutional holdings perform better on Monday than REITs with lower institutional holdings during the 1990s, but not in the 1980s. Furthermore, REITs that went public in the 1990s are the ones associated with the shift in the Monday return pattern. Our study supports the claim that the change in REIT structure and the increase in institutional participation in the REIT market in the 1990s make REIT stocks behave more like other equities in the stock market.
The Journal of Financial and Quantitative Analysis, 1995
We investigate the stock market reaction to 447 announcements of business relocation decisions in... more We investigate the stock market reaction to 447 announcements of business relocation decisions in the 1978-1990 period. We find that the stock market reaction to such decisions is tied to the motive for the relocation and the implied prospects for the firm, with the type of facility being relocated playing an insignificant role. Our finding reconciles several results in the literature concemmg the stock market reaction to announcements of capital investment decisions.
In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable i... more In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable interest rate for a construction loan. This mutually acceptable interest rate is the rate that makes a developer indifferent between using 100% equity financing and a construction loan. It is also the highest interest rate that a developer is willing to pay and a bank is willing to lend. The three risk factors identified in the model are the loss, leverage and first-phase loan ratios. Our analytical and numerical analyses indicate that the derived mutually acceptable interest rate has desirable properties as the rate increases with an increase in the three identified risk factors.
This study examines the impact of intra-project externalities and layout variables on the selling... more This study examines the impact of intra-project externalities and layout variables on the selling prices of 897 condominium units in the cities of Irvine and Santa Ana in Orange County, California. It documents that, at a micro-level, proximity to intraproject externalities such as greenspace, swimming pools, recreational areas, traffic noise, and the like, and project layout variables representing the location of individual condominium units within multiunit structures, have significant effects on the property values of units within a condominium project. The results indicate that, when cost is not prohibitive, both appraisers and underwriters should take intra-project externalities and layout variables into consideration when estimating property values or underwriting residential mortgages for condominium properties.
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