Underpricing in seasoned equity offerings: Evidence from European REITs and REOCs

Because real estate investment trusts (REITs) are limited in their funding due to restrictions on the debt ratio and retained earnings, seasoned equity offerings (SEOs) are major events in the lifetime of a REIT and essential to ensure profitable growth (Ghosh et al. 2000). To finance growth strategies, there is consensus in the literature that REITs need to regularly raise money through capital increases and therefore access the capital market more often. Although SEOs play an important role for REITs as well as for real estate operating companies (REOCs), issued shares are regularly offered at an offer price significantly lower than the price the shares are traded on the offer day – defined as underpricing. Consequently, the issuing firm accept multiples of their year’s earnings as “money left on the table” at equity offerings (Goodwin 2013).While underpricing is highly researched for initial public offerings (IPOs), far less is known about SEOs. Furthermore, literature on the pricing of seasoned offerings focuses on listed real estate in the US, with the European market remaining mainly unobserved. Because the overall market capitalization of REITs and the money raised through SEOs is rapidly growing in Europe with more and more countries implementing the REIT-regime, the objective of the study is to investigate underpricing in SEOs for European REITs and REOCs.Considering equity offerings, literature provides several theories for the occurrence of underpricing. Theories on asymmetric information and value uncertainty based on Rock’s “winner’s curse” (1986) and Beatty and Ritter (1986) were among the first. They conclude underpricing being attributed to cost-intensive information gathering processes due to value uncertainty around the offering. Further explanations contain theories on placement cost (Corwin 2003, Goodwin 2013) and timing of SEOs (Baker and Wurgler 2002, Andrikopoulos et al. 2017). This study contains offering, company specific and market data to gain further insights on the “underpricing puzzle” with respect to European firms. Total proceeds and market capitalization are applied as proxies for value uncertainty around the SEO. We use relative proceeds to check for hypothesis on placement cost. Additionally, information on the debt ratio control for liquidity issues. In terms of timing theories, performance indicators and stock price volatility are used. We furthermore investigate differences in underpricing for REITs and REOCs. Due to higher transparency, we suggest lower underpricing for REITs than for REOCs being in line with previous studies (Ascherl and Schaefers 2016). We expect also to draw conclusion on whether real estate companies with a specialized investment focus outperform diversified ones in terms of leaving less money “left on the table” (Freybote et al. 2008).This study is to our best knowledge the first to investigate underpricing in SEOs for European REITs and REOCs. We expect to identify determinants of underpricing for SEOs and analyze differences for REITs and REOCs. We furthermore suggest our findings to be lower than comparable studies on IPOs due to the disclosed track record after the IPO, but higher than comparable studies on SEOs in the US due to the maturity and market awareness of real estate companies, especially REITs, and the incremental conduction of equity offerings (e.g. ATM offerings). The goal of the study is to provide a better understanding of the underpricing phenomenon to contribute to the solution of the “underpricing puzzle”.