Abstract
This study examines whether the announcement of real estate investment trust (REIT) open-market stock repurchase programs contain information content about future operating performance over the period 1990–2001. We find no evidence that REIT stock buybacks are positively related to the operating performance. In fact, the operating performance of our sample REIT firms peak at the repurchase announcement year and deteriorate in the years following the announcement of share repurchases. Nevertheless, the sample REITs show higher levels of post-repurchase operating performance when compared to those of the pre-repurchase period. Additionally, our regression analysis shows that changes in future operating performance can explain the positive announcement effect.
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Notes
The REIT Modernization Act of 1999 reduces the payout ratio from 95% to 90%.
Giambona et al. (2005) find both short-term and long-run abnormal stock returns following the announcement of REIT open-market stock repurchases. Their results suggest that the long-horizon abnormal returns are mainly due to market undervaluation. Giambona et al. (2006) show that repurchase size is positively related to subsequent stock price appreciation as well as to future (three to nine months) operating performance. However, neither Giambona, Giaccotto, and Sirmans nor Giambona, Golec, and Giaccotto investigate whether or not operating performance improves after stock repurchase announcement. Thus, it is not clear whether REIT managers use a repurchase program to signal private information about their firm’s better future prospects.
We do not calculate abnormal returns using the market model. Since share repurchases are usually conditioning on large price decreases, the calculation of abnormal returns using the model based on price data before repurchases likely will bias the abnormal returns upward. Instead, we use an equally-weighted REIT portfolio as a benchmark to calculate abnormal returns. All REITs (the SIC code is 6798 or share codes are 18 (ordinary common shares, REITs) or 48 (shares of beneficial interest, REITs)) with return data available in the CRSP dataset are included in the equally-weighted REIT portfolio. The abnormal return is the difference between the daily return of a sample REIT firm and that of an equally-weighted REIT portfolio.
The dividend payout ratio is calculated as total dividends paid (item #21) divided by income available to shareholders (item #18–item #17). The target leverage ratio, LEVERAGE, is total debt divided by total assets in the year prior to the repurchase minus the average of LEVERAGE from year −4 to year −2.
The variable OPTIONS is the ratio of treasury shares (item #87) to shares outstanding.
FFO is calculated as net income (item #172) plus depreciation and amortization (item #14) and extraordinary items (item #124) minus gains and losses from sales of properties (item #107). We treat depreciation and amortization, extraordinary items, or gains and losses from sales of properties as zero if they are not available or missing in COMPUSTAT. Vincent (1999) finds that FFO calculated in this way using financial statement information is very close to the reported FFO by REITs.
In addition to FFOE, we also examine return on equity (ROE) and return on assets (ROA) to check for the robustness of the results. The ROE is equal to net income (item #172) scaled by the book value of equity (item #60) while the ROA is equal to operating income after depreciation (item #178) scaled by the book value of total assets (item #6). The results from ROE and ROA are consistent with the results from FFOE and hence are not reported.
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Huang, GC., Liano, K. & Pan, MS. REIT Open-Market Stock Repurchases and Profitability. J Real Estate Finan Econ 39, 439–449 (2009). https://doi.org/10.1007/s11146-008-9121-7
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DOI: https://doi.org/10.1007/s11146-008-9121-7