Efficient markets versus behavioral anomalies: the case of REITs

Purpose - This paper seeks to research potential evidence of capital market irregularities by scrutinizing whether the IPO (Initial Public Offering) phenomenon can be found in Real Estate Investment Trusts (REITs). Design/methodology/approach - The study employs stock price data of 90 US REITs and derives their performance on the first trading day, but also on a one‐, three‐, and five‐year basis. Findings - The primary offerings puzzle frequently observed in traditional IPOs is a market imperfection that also exists for REITs from 1991 to 2008. REITs display, on average, both significant first trading day under‐pricing and negative aftermarket performance, predominantly on a five‐year basis. Research limitations/implications - The research at hand offers evidence that stock irregularities can be found within the US REIT industry, albeit these do not necessarily serve as evidence against efficient markets. Notwithstanding the fact that it may be difficult to exploit the abnormal performance on the first day, investors can nonetheless earn substantial profits by shorting IPO stocks on a long‐term basis. Even net of transaction costs, such a strategy should have a positive abnormal return. However, these investments have to be executed cautiously as the profitability of such a strategy has to pay attention to the reputation of the underwriter, the cycle in which the IPO takes place and various other important factors. Originality/value - The research at hand offers evidence that REIT market irregularities oppose underlying rational human behavior.