Investment Analysis, Price Formation and Neglected Firms: Does Real Estate Make a Difference?

Abstract

This paper examines the relation between information‐gathering activities and price formation when the gatherers are small in number. Two measures of information asymmetry are estimated to test the cross‐sectional effect of investment‐analyst attention on price formation. The analysis contrasts firms that invest predominately in real estate assets to those that do not. Unlike most studies of the competition among information gatherers, the results in this paper indicate that liquidity worsens with increasing investment‐analyst attention. These findings provide further evidence that information deficiency is an important economic trait, although real estate securities may suffer less from neglect than from asset‐specific information asymmetry.

The Dynamics of REIT Pricing Efficiency

“…Boehmer and Kelley (2009) find evidence that analyst coverage may improve pricing efficiency. However, Downs and Güner (1999) and Downs and Güner (2000) find that increased analyst attention in REITs leads to lower liquidity. Lower liquidity should, all things equal, lead to inferior pricing efficiency.…”

“…We believe that this result is largely driven by the time period examined. Downs andGüner (1999, 2000) cover only the earliest part of our sample period, and our results related to the changing dynamics of REIT efficiency highlight how difficult it can be to extrapolate results from earlier sample periods to the current REIT market.…”

“…This is consistent with results found for general equities, but somewhat contradicts some previous results in the REIT literature. While Boehmer and Kelley () find analyst coverage to have beneficial effects for general equities, Downs and Güner (, ) find that greater analyst coverage in REITs tends to be associated with lower liquidity. In this case, we would expect inferior pricing efficiency.…”

“…We then decompose the total level of institutional ownership into three components based on the frequency of trading of the underlying institutions. Short-term institutional ownership (SIO) is the percentage ownership of the REIT held by institutions in the top decile 10 SeeDowns (1998) for a discussion of the rule change and the situation that led up to it. 11 Studies focusing on REIT institutional ownership tend to categorize institutions by their legal type (bank, pension fund, investment company, etc.).…”

“… See Giacomini, Ling and Naranjo (2017) for a discussion of REIT capital structure choices.15 SeeDowns and Güner (1999),Downs and Güner (2000) andBoudry, Kallberg and Liu (2011).…”