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ON THE DIRECT COSTS OF REIT SEOS
Sinan Gokkaya†
Ohio University
Matthew D. Hill††
University of Mississippi
G. Wayne Kelly†††
University of Southern Mississippi
First Draft: April 9, 2012
Revision Requested: May 27, 2012
Resubmitted: July 16, 2012
Keywords: REITs; SEOs; cost of equity; investment banking fees
†Sinan Gokkaya is an Assistant Professor of Finance at Ohio University. Electronic mail: gokkaya@ohio.edu.
†† Contact author Matthew D. Hill is an Assistant Professor at the University of Mississippi. Electronic mail:
mhill@bus.olemiss.edu. †††
G. Wayne Kelly is an Associate Professor of Finance at University of Southern Mississippi. Electronic mail:
Gary.Kelly@usm.edu.
2
ON THE DIRECT COSTS OF REIT SEOS
Abstract
This study examines the determinants of direct costs for REIT seasoned equity offerings. These
costs are not related to information asymmetries, unlike non-REIT firms. Gross spreads vary
inversely with stock liquidity, price, and industry activity. Concerning REIT-specific
heterogeneity, gross spreads are generally insensitive to property type and operating partnership
structure. Still, the findings suggest managers can influence costs as higher fees are directly
related to the use of underwriting syndicates and more reputable investment banks. Finally, a test
for differences in direct costs across REIT and comparable industrials shows significantly lower
direct issuance costs for REITs.
I. Introduction
Underwriters purchase shares from issuers at an offer price discount in a firm
commitment seasoned equity offering (SEO), which increases flotation costs that erode proceeds
from new equity issuance (Lee, Lochhead, Ritter, and Zhao (1996)). This discount is a direct cost
of equity issuance, providing compensation to investment banks for underwriting fees,
management fees, and selling concessions. For industrial firms, Lee and Masulis (2009) show
that direct costs of SEOs comprise 5-7% percent of capital raised via equity offerings and
represent the vast majority of total flotation costs. Eckbo, Masulis, and Norli (2007) conclude
that adverse selection problems contribute significantly to the magnitude of SEOs' direct costs.
This paper examines these direct costs for real estate investment trusts (REITs). REIT
equity issuance costs deserve separate attention due to the increasing size of the asset class
(Capozza and Seguin (2003)) and because of growing interest in the industry's financing
decisions (Ooi, Ong, and Li (2010)). The latter is attributable to REITs facing an exogenously
imposed financial constraint that forces heavy reliance on raising equity funds for property
investment. This constraint is the mandatory distribution of at least 90% of taxable income as
dividends, thereby providing their exemption from federal incomes taxes.1,2
Not surprisingly,
3
REITs exhibit financial characteristics consistent with their limited ability to accumulate internal
capital (Ott, Riddiough and Yi (2005) and Hardin, Highfield, Hill, and Kelly (2009)). Thus,
REITs tend to make acquisitions with short-term debt, which is repaid with proceeds from long-
term financing (Brown and Riddiough (2003)).3 The importance of equity financing for REITs is
heightened further in that these firms have a competitive disadvantage in issuing debt because of
their tax-exempt status (Howe and Shilling (1988)). Consistent with this disadvantage, Ghosh,
Nag, and Sirmans (1999) show that REITs issue equity three times more frequently than debt and
that SEO proceeds are almost double those for debt issues.
Since net proceeds from SEOs provide REIT investment capital, minimizing issuance
costs is imperative. Direct costs of SEOs for the sample of equity REITs account for roughly
4.64% (Table 1) of issuance proceeds. Hence, gross spreads for REITs are materially important,
motivating this research.
The multivariate analysis suggests the direct cost of REIT SEOs is largely unrelated to
firm-level proxies for information asymmetry, a significant departure from the industrial SEO
literature. Direct costs vary inversely with recent activity in the overall REIT SEO market,
possibly indicating that weaker adverse selection problems in capital markets reduce REITs'
direct equity costs. Further findings imply that REITs with increased trading volume and stock
prices pay lower fees, suggesting these characteristics lower investment banks’ placement costs
(i.e., direct and indirect intermediation costs). Results also show that gross spreads increase with
the number of underwriters and underwriter reputation, consistent with investment banks earning
reputational rents from SEO underwriting.
In contrast to economies of scale arguments for industrial SEOs, per-unit direct costs of
REIT equity increases with total issue proceeds. Further results show that the direct cost of REIT
4
equity is unrelated to discounting, suggesting investment banks do not jointly determine indirect
and direct underwriting fees for REIT equity issuers. Concerning REIT-specific heterogeneity,
differences in property focus and the use of operating partnerships generally do not influence
gross spreads. Further analysis reveals that the determinants of overall gross spreads also
determine individual components of direct costs (i.e., selling concessions and underwriting and
management fees).
These findings contribute to the literature as they provide insights to REIT managers on
the cost of equity capital. This study extends the overall SEO literature; focusing on REITs
mitigates problems associated with unobservable industry-specific heterogeneity. That is,
unaccounted for economic shocks that simultaneously influence the direct costs of SEOs for all
REITs should be a reduced concern for the present study because the sample is drawn from a
single industry.
This study also extends the literature by testing for differences in SEO direct costs across
REITs and matched non-REITs. This is an interesting component of the analysis because of the
growing debate on the relative transparency of REITs. From one perspective, REITs are
considered less subject to informational asymmetry due to reduced agency problems and fewer
strategic growth options that make market values less sensitive to human capital (Cannon and
Vogt (1995) and Feng, Ghosh, and Sirmans (2007a)).4,5
Furthermore, the tangibility of real estate
may reduce adverse selection costs for REIT investors relative to shareholders of industrial firms
that invest heavily in research and development expenditures. Alternatively, REITs may be less
transparent, as Han (2006) argues that real estate assets are illiquid and less transparent and
Campbell, Ghosh, and Sirmans (2001) state that income and ownership restrictions reduce the
effectiveness of the market for corporate control for REITs. Subsequently, REITs' unique
5
operating environment provides an interesting laboratory for studies on equity issuance (Ghosh,
Nag, and Sirmans (1999 and 2000) and Hartzell, Kallberg, and Liu (2005 and 2008)).
Univariate and multivariate evidence here suggests REITs have significantly lower gross
spreads than comparable non-REITs. This finding is consistent with these firms’ unique
operating structure reducing uncertainty in pricing equity. Results suggesting lower direct costs
for REITs are in line with Dolvin and Pyles' (2009) findings showing smaller price revisions for
REIT IPOs.
Overall, the findings are consistent with the notion that REITs are more transparent than
non-REITs. Whether industrials are more or less opaque than REITs, REITs clearly have a
strong incentive to seek a high degree of transparency.
II. Theory and Model
Prior studies of the determinants of the investment banking fees that arise from issuing
equity provide the basic framework for this study of factors influencing the direct costs of REIT
SEOs. That basic framework is expanded to include the impact of variables specific to REITs.
2.1.1 Asymmetric information and Uncertainty
Many studies show that gross spreads vary directly with firm-level asymmetric
information and price uncertainty present at the time of security issuance. Since these
characteristics are not directly observable, most studies employ proxies for information
asymmetry and price uncertainty and these proxies may also capture other influences, such as
industry and index-specific factors (Lee and Masulis (2009)). Common proxies for information
6
asymmetry include firm size, stock return volatility, prior lending relationship with the
underwriter, and availability of credit rating.
The first proxy for asymmetric information is firm size. Larger companies receive more
scrutiny from stock analysts and institutional investors so they necessarily exhibit less
information asymmetry than smaller firms (Livingston, Naranjo, and Zhou (2007). Indeed,
Butler, Grullon and Weston (2005) and Lee and Masulis (2009) find an inverse relation between
firm size and gross spread for industrial issuers.
Second, issuers’ ease of access to debt markets is generally considered a proxy for degree
of asymmetric information. Credit rating availability and whether or not the REIT has access to
private debt via revolving credit lines account for this effect.6 Liu and Malatesta (2006) find
lower gross spreads for industrial firms with higher credit ratings. The authors attribute this
finding to the information production function of public debt markets lowering adverse
selection costs. While the non-REIT SEO literature ignores access to credit lines, this is an
important variable for the present study as Hardin and Hill (2011) argue that REITs with access
to lines of credit undergo substantial bank monitoring. Further increasing the scrutiny provided
by private lenders, REITs are forced to manage liquidity via credit lines since they do not retain
meaningful levels of free cash flow (Hardin, Highfield, Hill, and Kelly (2009)).
Also associated with informational asymmetry is stock price volatility. Lee and Masulis
(2009) suggest that firms with more volatile stock returns face increased uncertainty, increasing
the value of investment banks’ guarantee in underwriting a firm commitment SEO. Butler,
Grullon and Weston (2005) and Lee and Masulis (2009) show positive relations between
investment bank fees and stock volatility for industrial issuers.
7
Another important control is prior lending relationship with the underwriter. Drucker and
Puri (2005) argue that issuers benefit from informational economies of scope that result from
employing the same investment banks in repeat SEOs. Prior lending by an underwriter leads to
using the same client information for future financing and should therefore lower external
financing costs. Consistently, Drucker and Puri (2005) find that issuers employing the same
investment banks pay lower investment banking fees.
In addition to the proxies above that reflect existing SEO literature, the following controls
account for information asymmetry specific to the REIT industry: the operating partnership
structure, the number of SEOs in the previous year, corporate transparency, and a post-1990
REIT dummy.
Accounting for the use of operating partnership is important because the choice of
structure may induce information asymmetries. With operating partnerships, or more
specifically, umbrella partnerships (UPREITs), the limited partnership owns the properties while
the REIT owns a controlling interest in the partnership. Han (2006) argues that partnerships give
rise to conflicts of interest between common shareholders and operating partners because of
differences in marginal tax rates. Ling and Ryngaert (1997) and Downs, Guner, and Patterson
(2000) also state that partnerships increase information asymmetries, while Ghosh and Sirmans
(2003) note that partnerships may increase organizational complexity. Given these findings,
controlling for the partnership organizational structure is warranted because it may be related to
REIT information asymmetries, hence, direct costs of SEOs.7
Goodwin (2011) finds a significant inverse relation between REITs' indirect SEO costs
and the number of equity issues placed by industry participants in the previous year. This
8
suggests that equity market participation results in information production and reduces value
uncertainty.
An, Cook, and Zumpano (2011) find a positive relation between corporate transparency
and firm growth for REITs, consistent with greater transparency lowering the cost of capital.
Following this study, the proportion of unexplained variation from expanded market model
regressions is employed to control for the transparency of REIT operations.8
Ghosh, Nag, and Sirmans (2000) argue that older REITs have more certain future prospects than
REITs going public post-1990 because the latter derive a greater proportion of their value from
growth options. Ghosh, Nag, and Sirmans (2000) find that REIT SEOs conducted post-1990 are
more underpriced than pre-1990 IPOs. Hence, whether or not the REIT went public after 1990 is
used as a final control for information asymmetry.
2.1.2 Placement Costs
Empirical evidence on economies of scale in industrial SEO investment banking fees is
mixed. Butler, Grullon, and Weston (2005) and Lee and Masulis (2009) find a significant
inverse relation between per unit investment bank fees and the total proceeds raised via SEOs.
This is consistent with economies of scale in SEOs, where the per-unit cost declines with issue
size. In contrast, increased issue size may raise the costs of underwriter certification,
monitoring, and marketing services, and diminish returns from these services. Thus, some
issuers may experience diseconomies of scale. Altinkilic, and Hansen (2000) find higher
marginal costs for larger issues and attribute this finding to issuers not choosing the level of
proceeds to minimize relative cost of the fees.
9
2.1.3 Stock Liquidity and Price
Butler, Grullon, and Weston (2005) argue that the liquidity of a particular stock reduces
investment banks’ intermediation costs, including inventory costs, adverse selection risks, and
the sunk costs of processing transactions. Butler, Grullon and Weston (2005) also argue that
institutional investors tend to ignore firms with low-priced stocks. Thus, investment banks might
have more difficulty placing illiquid and low-priced issues, thereby increasing the investment
banks’ costs of new equity issues. Their empirical results support this argument showing that
investment banks charge lower fees to firms with higher priced and more liquid stocks.
2.1.4 Underwriter Reputation and Syndicates
In a competitive underwriting market, underwriters’ profitability comes from their ability
to reduce the costs of due diligence, enabling them to lower underwriting fees without reducing
profit (Lee and Masulis (2009)). However, if the underwriting market is oligopolistic, more
reputable underwriters could charge higher fees to underwrite an SEO (Gande, Puri, and
Saunders(1999).9 A competing theory offered by Mandelker and Raviv (1977) and Chemmanur
and Fulghieri (1994) argues that investment bank fees might simply reflect the surplus proceeds
generated for the issuer as a result of marketing during the roadshow conducted by the
underwriters. Both theories predict a positive relation between underwriter reputation and
investment bank fees. Fernando, Gatchev, May, and Megginson (2012) find this to be the case
in the underwriting of industrial SEOs. Furthermore, the gross fee might also decline with the
level of coordination as well as risk sharing between underwriters during an SEO and issuances
with multiple underwriters should be associated with smaller fees (Mandelker and Raviv
10
(1977)). Consistently, Butler, Grullon, and Weston (2005) show that industrial SEOs written by
underwriting syndicates are associated with lower fees.
2.1.5 Primary Capital Market Activity
The degree of SEO activity in the primary capital market may influence investment
banking fees for firms accessing capital markets. Increased financing activity in the primary
market may lower the adverse selection costs in the overall market, reducing the cost of issuing
equity. However, increased primary market activity may instead reflect higher investor demand
for new equity offerings, leading to a crowding out effect that increases the costs of raising
external capital (Boudoukh and Whitelaw (1993)). Consistent with the latter, Altinkilic and
Hansen (2000) find a direct and significant relation between investment bank fees and the level
of financing activity in non-REIT primary market SEOs.10
2.1.6 Offer Method
Firms issuing shelf-registered equity via Rule 415 have two years to undertake the offer
after filing with the Securities and Exchange Commission (SEC). Thus, Rule 415 may increase
competition among potential underwriters, leading to lower banking fees. Supporting this
notion, Lee and Masulis (2009) and Autore and Kumar (2008) find significantly lower
underwriting fees for shelf-registered issues, as compared to fully marketed SEOs. Denis (1993)
argues that heterogeneity among types of firms choosing shelf registration, not the shelf-
registration itself, leads to the finding of lower underwriter fees.
2.1.7 Discounting/Underpricing
11
Kim, Palia, and Saunders (2010) argue that the indirect costs of undertaking firm-
commitment SEOs (a.k.a. discounting or underpricing) might be jointly determined with
investment bank fees.11
They show a positive and significant relation between gross spreads and
indirect costs for industrial SEOs, in line with the costs being complementary. More recently,
extending the REIT IPO underpricing models to SEOs (e.g. Chang, Wang and Yang (2009)),
Goodwin (2011) examines the indirect costs of REIT SEOs for a sample of issuers between
1994 and 2006 and finds that SEO discounting (underpricing) costs the typical REIT almost
$1.7M ($1.2M). To account for the potential correlation between indirect and direct costs of
SEOs, discounting is controlled for in the multivariate models.
2.2 Multivariate Model
This study follows recent SEO research by Lee and Masulis (2009) and Kim, Palia, and
Saunders (2010) and measures the total direct costs of SEOs as the dollar fees paid to investment
banks divided by total proceeds (GrossSpread). The dollar fee is the difference between the price
at which the underwriting syndicate buys shares from issuers and the share offer price. Hence,
GrossSpread is the dependent variable for baseline specifications. In subsequent models, the
dependent variable is respecified to analyze individual components of direct costs.
Equation (1) specifies the baseline model:
(1). Pr
)Pr(
)Pr()()Pr(
1990Pr Pr
)(
,
2007
1991
6
1
,18,17,16,15
,14,13,12,11
10,9,87,6
5432,10,
tij jj j
titititi
titititi
ititiiti
i,ti,ti,tLowMktCaptiti
YearDummymiesopFocusDum
oceedsREITLnDiscountShelfMultiBook
RankiceShareLnTurnoverLnoceedsTotLn
PostcyTransparenevSEOsUPREITiorLend
l)Ln(StockVoLOCRated DMktCapLndGrossSprea
12
The following variables control for various components of information asymmetry: Ln(MktCap)
is the natural logarithm of the market capitalization of the issuer, using the share price one day
prior to the date of issuance. DLowMktCap is a binary variable equal to 1 if the firm is in the lowest
decile of market capitalization and 0 otherwise. This variable accounts for the presence of micro-
REITs, which is important since some sample firm-years have market capitalizations of less than
$100M. The variable Rated (LOC) is a dummy variable set equal to 1 if the firm has a long-term
S&P debt rating (access to credit lines), 0 otherwise. Ln(StockVol) is the volatility of daily
returns over the 6 months prior to the offering date. PriorLend is an indicator variable that equals
1 if the underwriter has served as the underwriter on a prior equity offering for the issuer, 0
otherwise. UPREIT is a dummy variable set equal to 1 if the REIT is an operating partnership, 0
otherwise. The number of times the firm accessed the SEO market during the previous year is
accounted for with the variable PrevSEOs. Transparency is 1 minus the proportion of explained
variation in the expanded market model regressions calculated over the pre-issue year. Post1990
is a binary variable equal to 1 if the IPO was issued after 1990, 0 otherwise.
The variable Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds, which
provides a test for economies of scale in REIT SEOs. The natural logarithm of average monthly
stock volume divided by number of shares outstanding over the 12 months prior to offering
(Ln(Turnover)) and the natural logarithm of share price on the day prior to the issue
(Ln(SharePrice)) serve as proxies for liquidity and institutional demand for the REIT’s stock,
respectively. Rank measures underwriter reputation and is based on the Carter and Manaster
reputation measure (obtained from the website of Jay Ritter). MultiBook is a binary variable
equal to 1 if there are multiple bookrunners, 0 otherwise. Shelf is also binary, equal to 1 if the
issue is registered under Rule 415, 0 otherwise. Discount is the offer price discount defined as
13
the closing price on the day prior to the SEO minus the offer price scaled by closing price on the
day prior to the SEO (Huang and Zhang, 2011).12,13
Ln(REITProceeds) accounts for the equity
issuance activity in the overall REIT market and is defined as the natural logarithm of total SEO
proceeds raised by REITs over the 3 months prior to the issue.
Property focus and time effects warrant additional controls. The former is important since
the riskiness of cash flows might also be linked to adverse selection; hence, investment banks
may price this risk into the direct costs of SEOs. Property type is defined by the seven property
classifications of the property focus variable provided by SNL: Hotel, Industrial, Office, Other
(Diversified, Manufactured Homes, or Other), Residential, Retail (Mall, Retail, or Shopping),
and Self-storage. Other is the base property type for this study. Annual dummies account for
macroeconomic effects that affect all firms in a given year.
While the gross spread is the total compensation paid to the group of underwriters, it is
often comprised of three separate components: management fees, underwriting fees, and selling
concessions. Each cost component accrues from different services provided and risks undertaken
by the respective group (managing, underwriting, and selling) in the syndicate.14
Because of
these different sources of risk, the direct costs are decomposed into the three components and
Equation (1) is re-estimated using alternative dependent variable specifications. Therefore, while
total direct costs of equity issuance establish the baseline results, the decomposition sheds more
light on the underwriting fee setting strategy for REITs.
III. Data and Summary Statistics
The sample of equity REITs is identified by using monthly trade publications produced
by the National Association of Real Estate Investment Trusts (NAREIT).15
The Center for
14
Research on Security Prices (CRSP) is the source of stock prices, returns, volume, and number of
shares outstanding. Securities Data Corporation (SDC) New Issues Database provides necessary
data on REIT SEOs, including issue dates, total proceeds, underwriters, and shelf registration.
Underwriter reputation is taken from Jay Ritter's website. SNL REIT Datasource provides
property focus, operating structure, access to credit lines, and S&P credit ratings.
Following previous empirical studies on gross spreads (Butler, Grullon, and Weston
(2005), Lee and Masulis (2009), and Kim, Palia, and Saunders (2010)), the present sample
covers REIT issuers using a firm commitment contract.16
Under this flotation method,
underwriters buy shares from issuers at a discount from the offer price. This discount represents
investment banks fees, compensating underwriters for their services.
Our final sample is an unbalanced panel of 460 firm-commitment equity offerings made
by 144 unique equity REITs over the 1990-2007 period. The maximum, minimum, and mean
number of individual firm appearances are12, 1, and 1.49, respectively.
Table 1 presents the sample descriptive statistics. The distribution of direct costs as a
proportion of issue proceeds (GrossSpread) is relatively symmetric across the sample of REITs
with mean and median of 4.65% and 5.23%, respectively. These measures of location indicate
negative skew in GrossSpread; that is, certain sample firms have relatively low investment
banking fees. One particular REIT paid roughly 7.14% (maximum) of issue proceeds in the form
of direct costs, or roughly $4.1M in investment banking fees. Regarding control variables, only
28% percent of the sample has an S&P long-term debt rating, while about 75% of the sample has
access to private bank debt. The average REIT SEO generates $88.68M in issuance proceeds.
The mean underwriter rank is 8.43. These values are similar to those reported in previous REIT
SEO studies (Goodwin (2011)) and slightly higher than for industrial SEOs (Lee and Masulis
15
(2009)). During the three months prior to SEO, the REIT industry collectively issued over
$2.23B in seasoned equity offerings (REITProceeds).
Panels A, B, and C of Table 2 show the distribution of the sample across time, property
focus, and operating structure, respectively. The time-series variation in SEOs indicates some
clustering with spikes in issuance during 1997-1998. Comparing GrossSpread at the endpoints of
the sample period, the direct costs of REIT SEOs declined from 5.99% to roughly 2.39%, while
issuance proceeds increased substantially.
Findings in panel B are consistent with the number of REITs within the property types, as
REITs classified as Retail and Office (Storage) use SEOs most (least) frequently. Casual
comparison of mean GrossSpread shows some variation across property focus.
Panel C of Table 2 shows 80.21% of the sample firms as operating partnerships
(UPREIT).17
GrossSpread is roughly 0.27% lower for UPREITs relative tothe sub-sample of
non-UPREITs. The null hypothesis of mean equality in GrossSpread across groups is rejected
only at the 10% level. This univariate finding is inconsistent with higher costs of equity for
REITs with greater information asymmetries.
Table 3 provides Pearson correlation coefficients for the variables included in Equation
(1). GrossSpread and its cost components are significantly associated with many of the
traditional determinants of SEO direct costs and many of the correlations support the initial
expectations. Further inferences accompany the presentation of multivariate results. Although
untabulated, high correlations among some control variables motivates presentation of a reduced-
form models to mitigate collinearity concerns.
IV. Multivariate Results
16
4.1 Baseline Results
Table 4 presents pooled OLS regression results for the determinants of REIT investment
banking fees. Each model includes untabulated fixed time effects. Following Petersen (2009),
standard errors are heteroskedasticity-consistent and cluster at the firm level. Column 1 presents
results after estimating Equation (1), while the remaining columns provide findings for
alternative specifications.
Results in column 1 are generally inconsistent with information asymmetry influencing
the direct costs of REIT SEOs. In fact, the sole statistically significant proxy for information
asymmetry is DLowMktCap. A significant increase in direct costs for micro-REITs, matches
expectations and implies that investment bankers require additional compensation for bearing the
increased risk of placing new equity for extremely small REITs. In terms of economic
significance, the coefficient estimate for DLowMktCap suggests a 0.45% increase in GrossSpread
for REITs in the lowest decile of market capitalization. This coefficient estimate implies a
$0.401M increase in gross spreads for these issuers.
Overall, results from the initial model estimation provides scant evidence of information
asymmetries influencing the direct costs of REIT SEOs, in contrast with Goodwin’s (2011)
finding of a weak positive relation between indirect costs of REIT SEOs and information
asymmetry. This also differs dramatically from results presented in the non-REIT SEO literature
and may be due to the transparency of REITs. Differences in direct costs across REITs and non-
REITs are further examined below.
Results in column 1 of Table 4 show a positive and significant (1% level) relation
between the direct costs of equity issuance and total issue proceeds. That is, the observed relation
between GrossSpread and Ln(TotProceeds) indicates that per unit costs of share issuance
17
increase with issue proceeds. This finding indicates a diseconomy of scale in direct costs of
REIT SEOs in contrast with the non-REIT SEO literature where economies of scale appear in
share issuance costs (Butler, Grullon, and Weston (2005) and Lee and Masulis (2009)). The
direct relation between direct costs and SEO issuance proceeds aligns with Altinkilic and
Hansen’s (2000) theory that issuers focus on financing needs, not cost minimization which is
plausible for REITs given the unique operating restrictions that induce financial constraint.
The trading characteristics of the issuer's stock exert significant influence on direct costs,
as both turnover and share price are negative and statistically significant. These coefficients are
consistent with the view that weaker trading frictions result in lower underwriters’ intermediation
costs and provides increased demand by institutional investors, resulting in lower investment
banking fees (Butler, Grullon, and Weston (2005)).
GrossSpread is directly and significantly associated with underwriter reputation, which
implies that more reputable banks charge higher fees. This is consistent with investment banks
earning reputational rents from SEO underwriting (Fernando, Gatchev, May, and Megginson
(2012)). In contrast to the non-REIT SEO literature, REITs employing an underwriter syndicate
(MultiBook) pay significantly higher banking fees. Specifically, REIT issuers employing an
underwriting syndicate pay $0.518M more, on average. Apparently, the coordination and risk
sharing among members of underwriting syndicates does not result in lower fees. This may be
due to reputational rents exceeding the efficiencies resulting from the coordination and risk
sharing in an underwriting syndicate for REIT SEOs. The variable Shelf is insignificantly
different from zero, suggesting that REIT investment banking fees are invariant to offer method.
GrossSpread and Discount are insignificantly related, suggesting that the direct and
indirect costs of REIT seasoned offerings are not complementary. Despite its statistical
18
insignificance, controlling for Discount is an important aspect of our study as it allows us to
make stronger inferences with respect to the other factors that influence SEO direct costs for
REITs.
Interestingly, investment banking fees are inversely related to recent REIT SEO activity
in the primary market. In contrast to the crowding out effect shown for industrial SEOs
(Altinkilic and Hansen (2000)), the present results indicate that increased financing activity
lowers the direct cost for REITs issuing securities (Bayless and Chaplinsky (1996)).18
This
implies that adverse selection in the overall REIT market, not the firm level, affects the cost of
raising equity capital. This finding aligns with the Goodwin (2011) results showing significantly
reduced discounting for REIT SEOs during periods of high financing activity.
Coefficient estimates for the property dummies represent differences in the cost of equity
capital relative to REITs classified as Other, the base property type. All else constant, results
exhibit no significant variation in GrossSpread across property focus. To conserve space results
for the time dummies are omitted; however, the coefficient estimates are significantly negative
during the 2003-2007 period, reaching a minimum in 2006 and 2007. Similar to the univariate
and time-series variations in GrossSpread, these findings are consistent with increased
transparency and liquidity over the sample period for the overall REIT equity market.
4.2 Decomposition of GrossSpread
In columns 2-4 and again in columns 6-8, the dependent variable in Equation (1) is
respecified to represent the individual components of GrossSpread. Individual costs consist of
management fees, underwriting fees, and selling concessions across columns 2-4, respectively.19
19
This decomposition allows refinement of the analysis and more precision in determining the cost
components that can be managed by altering REIT financial or operating characteristics.
The significant determinants of GrossSpread generally hold across the individual
components. Specifically, DLowMktCap, Ln(TotProceeds), Ln(Turnover), and Ln(SharePrice) retain
their statistical significance and are signed similarly to the column 1 values. An interesting
difference emerges with respect to UPREIT: where results show lower management fees for
REITs using the operating partnership structure. This finding is opposite our expectation given
that increased informational frictions accompany the partnership structure (Han (2006)). Further,
the inverse relation between management fees and UPREIT also contrasts with Goodwin’s
(2011) finding of significantly greater discounting (indirect costs) for REITs using the
partnership structure.
Another result different from expectations is that only the underwriting fee portion of
gross spread is significantly related to underwriter reputation (Rank), consistent with investment
banks earning reputational rents from making underwriting commitments for REIT SEOs.
Finally, the use of underwriting syndicates (MultiBook) results in higher underwriting fees and
selling concessions. This finding does not support the idea of risk sharing between underwriters
leading to lower cost of seasoned equity for REITs.
4.3 Robustness Tests
The remaining results in Table 4 indicate the robustness of the initial findings to
collinearity concerns that may produce the unexpected outcomes in the preceding section. To
determine whether the correlation among the independent variables unduly influences
significance levels, a general-to-simple modeling strategy estimates parsimonious versions of
20
Equation (1), as displayed across columns 5 and 8.20
The parsimonious model does not include
Ln(MktCap) or DLowMktCap because of their close relationhips with the other controls. Post1990 is
excluded due to its correlation with UPREIT. Ln(StockVol), Shelf, and Rated are also dropped
from the baseline model because of their high correlations with Ln(SharePrice). As a result, the
parsimonious model includes information asymmetry proxies specific to the REIT industry
(UPREIT, Transparency, and PrevSEOs), access to private bank debt (LOC), and PriorLend.
Reduced-form results are qualitatively similar, to the initial findings, as the cost of equity
remains unrelated to firm-level informational asymmetries, negatively related to market level
activity, and directly related to underwriter reputation as well as use of underwriting syndicates.
Another concern is whether the initial results are robust to unobserved REIT-specific
heterogeneity. To mitigate this concern Equation (1) is re-estimated using random effects (Table
5). Tests for fixed effects (Hausman (1978)) support the null hypothesis of no fixed firm effects
(χ = 18.32 and p-value = 0.975), hence random effects are preferred.
The findings from the random effects models are in line with the pooled OLS analysis.
GrossSpread does not vary with firm-level information asymmetry; however, it is inversely
related to the adverse selection costs in the overall REIT market. Investment bank fees are also
positively related to underwriters’ reputation and utilization of multiple lead investments during
the REIT SEO underwriting process.The relation between management fees and UPREIT is
much weaker using the random effects methodology, suggesting that the positive effect of
UPREIT is driven largely by unobserved firm effects correlated with the partnership structure.
4.4 Differences in Direct Costs of Equity for REITs and non-REITs
21
This analysis concludes by testing for differences in investment banking fees across REIT
and industrial issuers of seasoned equity. This is an important issue because of structural
differences between REITs and non-REITs that may imply differences intransparency between
REITs and non-REITs. Dolvin and Pyles (2009) find smaller price revisions for REIT IPOs,
relative to a matched sample of industrial firms, and attribute this to reduced adverse selection
costs. It follows that investment banking fees may systematically vary between REIT and non-
REIT industries.21
To test this conjecture, each sample REIT is matched to an industrial firm undertaking a
firm commitment seasoned equity offering. The matching procedure requires a non-REIT SEO
within 30 days of the REIT SEO, and the issue size proceeds must range between 80-120% of
the REIT’s total gross proceeds. The issue with total proceeds closest to that of the REIT is used
when multiple non-REITs meet the matching criteria.
Table 6 provides univariate results for the difference in direct costs of equity across the
sub-samples. Average GrossSpreads are 4.65% and 5.22% for REITs and non-REITs,
respectively. The cost differential (0.571%) is significant at the 1% level, providing initial
evidence that REITs pay less for SEOs.
Table 7 presents multivariate test results for differences in SEO direct costs across REITs
and matched non-REITs where Equation (1) is augmented by including the binary variable REIT,
which equals 1 if the firm-year observation is a REIT, 0 otherwise. Another change in the model
is that line of credit data is omitted from this component of the analysis, being unavailable for
industrial firms. Further, this variant of Equation (1) includes neither property focus dummies
nor UPREIT, as the focus is on differences in investment banking fees across REITs and non-
REITs. Since the pooled model includes REIT and traditional issues, Ln(MarketProceeds) is
22
defined as the equity issuance activity for both REITs and industrial firms over the 3 months
prior to the issue.22
Similarly, Transparency for industrial firms is computed as 1 minus the
explained proportion of the sum of squared errors from market model regressions over the pre-
issue year.23
Consistent with univariate evidence, the multivariate results suggest that REITs have
significantly lower investment banking fees than industrial issuers after controlling for the
traditional determinants of SEO direct costs. The coefficient estimate for REIT indicates that
GrossSpread is 1.12% lower for REITs relative to comparable non-REITs. Results in columns 2-
4 suggest that the REIT discount extends to each component of the associated investment
banking fees. The REIT effect also appears in the reduced-form model results (columns 5-8).
Models presented in Table 8 address random effects, again for a matched sample. These findings
indicate that even after accounting for unobserved firm-specific heterogeneity, REIT is
statistically significant at the 1% level.
The significantly lower direct costs of SEOs for REITs may be attributable to reduced
price uncertainty resulting from operating restrictions that reduce growth opportunities and free
cash flow problems. Importantly, this finding is consistent with the lower costs of IPOs for
REITs, as reported by Dolvin and Pyles (2009). The lower direct costs of SEOs and costs of IPO
further support the view that investors face less adverse selection problems with REITs than with
non-REITs.
To determine whether these findings are sensitive to the matching procedure, the model is
re-estimated using an alternative matching methodology. A particular concern is that REITs may
receive a bulk rate discount for using equity markets so frequently. Accordingly, the matching
procedure is extended to include an SEO frequency dimension.24
Specifically, each sample REIT
23
is re-matched to an industrial firm by requiring non-REIT issuers to have the same number of
SEOs in the year prior to the issue. As before, the non-REIT SEO must range between 80-120%
of the REIT’s total gross proceeds and occur within 30 days of the REIT SEO. The non-REIT
SEO with the closest total proceeds is chosen in case multiple non-REITs meet the matching
above criteria.
After re-estimating results using the sample generated by this alternative matching
methodology, the findings from the alternative matching (not tabulated here) still suggest
significantly lower gross spreads for REIT SEOs. Specifically, the coefficient estimate for REIT
implies that REIT investment bank fees are 1.23% cheaper for REIT SEOs, relative to
comparable non-REIT SEO direct costs. The significance of REIT is robust across each direct
cost component.
V. Conclusion
This study provides the first examination of the magnitude and determinants of the direct
costs of raising external capital via REIT SEOs. In addition to extending the growing body of
literature examining issues related to SEOs, this study has implications for practitioners. REIT
managers can use these results to seek ways to reduce their firms’ cost of equity capital. This is a
non-trivial implication given that the univariate results indicate that REIT gross spreads are
typically 4.65%.
In terms of multivariate results the direct cost of REIT SEOs, unlike industrial SEOs, is
almost exclusively unrelated to firm-level information asymmetry. However, increased trading
liquidity and high share prices lower investment bank fees, consistent with these characteristics
mitigating investment banks’ costs of placing newly issued equity. Furthermore, gross spreads
24
are positively related to the level of proceeds, unlike the economies of scale for industrial firms.
This finding supports the idea that REITs focus on the level of equity proceeds, not on
minimizing investment banking fees. Further, REITs employing underwriting syndicates and
investment banks with better reputations pay higher fees. Findings show scant variation in gross
spreads across property focus or operating structure. These inferences generally hold after
specifying the individual components of gross spreads as the dependent variable.
Importantly, the direct costs of REIT SEOs are significantly lower relative to a matched
sample of non-REITs. This finding parallels evidence from REIT IPOs and provides additional
support for REITs being more transparent relative to industrial firms.
This study provides several avenues for future research. For example, further analysis in
the REIT SEO area is needed to determine whether issuers receive a discount from using the
same underwriter for multiple SEOs. Along the same lines, does a switch in underwriter generate
differences in costs? An interesting question for future research involves whether issuers using
SEOs extensively pay lower fees than firms that are less active issuers of equity.
25
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30
Table 1. Descriptive Statistics
Variables N Mean Standard
Deviation Minimum Median Maximum
GrossSpread (%) 460 4.647 1.417 0.109 5.231 7.141
ManagementFee(%) 460 0.911 0.307 0.0217 2.904 0.993
UnderwritingFee(%) 460 0.944 0.310 0.0217 1.621 1.015
SellingConcession (%) 460 2.569 0.797 0.065 4.284 2.778
MktCap($M) 460 812.001 840.853 10.904 537.834 5211.360
DLowMktCap 460 0.100 0.300 0.000 0.000 1.000
Rated 460 0.280 0.449 0.000 0.000 1.000
LOC 460 0.752 0.432 0.000 1.000 1.000
StockVol 460 0.013 0.004 0.007 0.012 0.048
PriorLend 460 0.410 0.492 0.000 0.000 1.000
UPREIT 460 0.802 0.398 0.000 1.000 1.000
PrevSEOs 460 0.665 0.863 0.000 0.000 6.000
Transparency 460 0.478 0.238 0.010 0.445 0.995
Post1990 460 0.780 0.414 0.000 1.000 1.000
TotProceeds($M) 460 88.682 88.604 7.601 58.400 661.905
Turnover (%) 460 0.330 0.201 0.026 0.299 1.869
SharePrice ($) 460 26.015 11.397 5.700 25.250 126.590
Rank 460 8.435 0.901 4.750 9.000 9.000
MultiBook 460 0.097 0.297 0.000 0.000 1.000
31
Shelf 460 0.736 0.440 0.000 1.000 1.000
Discount 460 0.015 0.093 -1.808 0.009 0.501
REITProceeds ($M) 460 2,237.080 1,498.480 0.000 2,127.180 4,902.740
This table presents sample characteristics of the 460 firm-commitment REIT SEOs conducted by 144 unique REITs over the 1990-2007 period.
GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price
and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds.
UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. MktCap is market
capitalization, calculated as the number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator
variable set equal to 1 if the firm is in the lowest decile of market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0
otherwise. LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0 otherwise. StockVol is the standard deviation of daily stock
returnsover the 12 months prior to the SEO issue date. PriorLend equals 1 if the underwriter has previously underwritten equity offerings for the
issuer, 0 otherwise. UPREIT equals 1 if the firm uses anoperating partnership structure, 0 otherwise. PrevSEOs is the number of SEOs in the previous
year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable that
takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. TotProceedsis SEO issuance proceeds. Turnover is average monthly stock volume
divided by number of shares outstanding over 12 months prior to the SEO issue date. SharePrice is the firm's stock price on the day prior to SEO
issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable equal to 1
if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise.
Discount is the offer price discount, defined as SharePrice minus the offer price divided by SharePrice. REITProceeds is the total SEO proceeds
raised by all REITs over the 3 months prior to the SEO.
32
Table 2.Time and Property Focus Distribution of Sample of REITs
Year N GrossSpread(
%)
Management
Fee(%)
Underwriting
Fee(%)
Selling
Concession(%)
Average
TotProceeds ($M)
1990 2 5.994 1.236 1.169 3.588 97.216
1991 6 5.634 1.112 1.202 3.214 57.363
1992 9 5.450 1.029 1.049 2.990 70.836
1993 15 5.345 1.016 1.085 2.873 115.006
1994 23 5.342 1.047 1.155 2.972 117.789
1995 41 5.390 1.010 1.083 2.874 107.607
1996 52 5.002 0.967 1.004 2.674 118.835
1997 100 4.876 0.940 0.977 2.673 134.198
1998 116 3.854 0.773 0.800 2.229 62.204
1999 4 5.267 1.106 1.155 2.614 152.819
2000 5 4.372 0.849 0.849 2.547 177.113
2001 22 5.200 1.083 1.041 2.798 85.024
2002 13 4.997 0.960 0.979 2.834 104.222
2003 5 4.294 0.783 0.837 2.389 71.304
2004 14 3.875 0.754 0.733 2.229 117.593
2005 17 4.305 0.896 0.863 2.320 144.803
2006 14 3.432 0.730 0.725 1.920 192.767
2007 2 2.389 0.478 0.780 1.432 148.367
460 REIT SEOs
(144 Unique REITs) 4.647
106.564
33
Panel B: Property Focus Distribution of Sample
Property
Focus N
GrossSpread
(%)
Management
Fee(%)
Underwriting
Fee(%)
Selling
Concession(%)
Average
TotProceeds($M)
Hotel 52 4.553 0.911 0.906 2.456 128.336
Industrial 26 4.395 0.842 0.907 2.382 78.646
Office 106 4.471 0.863 0.901 2.247 145.585
Other 61 4.797 0.941 0.966 2.696 103.721
Retail 111 4.713 0.926 0.952 2.619 79.762
Residential 83 4.847 0.959 1.01 2.680 91.081
Storage 21 4.510 0.881 0.906 2.496 101.374
Total 460 REIT SEOs
Panel C: UPREIT Distribution
In an UPREIT? N Gross Spread
(%)
Management
Fee(%)
Underwriting
Fee(%)
Selling
Concession(%)
Average
TotProceeds
($M)
Yes
369
4.593
0.893
0.930
2.536
110.554
No 91 4.866 0.983 1.003 2.703 90.383
Difference in
Means (T-
statistics)
1.88*
2.38**
2.20**
1.96*
Panels A, B, and C of this table present the distribution of the sample across time, property focus, and operating structure, respectively. The sample consists of 460 firm-commitment REIT SEOs
conducted by 144 unique publicly traded equity REITs over the 1990 to 2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the
difference between the offer price and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is
34
underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. TotProceeds is SEO issuance proceeds (inflation-adjusted and in millions). The 7
categories of property focus (taken from SNL) are Hotel, Industrial, Retail (Retail, Regional Mall, Shopping Center), Residential, Office, Storage, and Other (Diversified, Health Care, Manufactured
Homes, and Other). T-statistics are calculated assuming unequal variances. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
35
Table 3.Pearson Correlation Coefficients
Variable GrossSpread ManagementFee UnderwritingFee SellingConcession Ln(MktCap) -0.343*** -0.257*** -0.299*** -0.282*** DLowMktCap 0.243*** 0.208*** 0.217*** 0.223*** Rated -0.160*** -0.072 -0.110** -0.123*** LOC -0.065 -0.073 -0.042 -0.067 Ln(StockVol) 0.136*** 0.083* 0.098** 0.110** PriorLend -0.006 0.011 0.006 -0.016 UPREIT -0.076* -0.116** -0.093** -0.083* PrevSEOs -0.194*** -0.167*** -0.163*** -0.158*** Transparency 0.110** 0.078* 0.102** 0.063 Post1990 -0.095** -0.097** -0.096** -0.095** Ln(TotProceeds) 0.204*** 0.137*** 0.152*** 0.114** Ln(Turnover) -0.262*** -0.252*** -0.268*** -0.257*** Ln(SharePrice) -0.315*** -0.258*** -0.264*** -0.274*** Rank 0.140*** 0.116** 0.138*** 0.099** MultiBook -0.025 -0.018 -0.031 -0.041 Shelf -0.263*** -0.204*** -0.236*** -0.238*** Discount -0.122*** -0.096** -0.099** -0.096** Ln(REITProceeds) -0.298*** -0.242*** -0.287*** -0.228***
This table shows Pearson correlation coefficients for many of the variables used in the analysis. The sample consists of 460 firm-commitment REIT SEOs conducted by 144
unique REITs over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the
offer price and the price at which the underwriting syndicate buys shares from the issuer. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number of
shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable that is set equal to 1 if the firm is in the lowest decile of market
capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. LOC is a binary variable that is set equal to 1 if the issuer has a line of credit, 0
otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the
underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. UPREIT equals 1 if the firm uses an operating partnership structure, 0 otherwise. PrevSEOs is
the number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable
that takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of
the average monthly stock volume divided by number of shares outstanding over 12 months prior to the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock
price on the day prior to SEO issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that
equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer
price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3
months prior to the SEO. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
36
Table 4. Pooled OLS Results
Independent Variables
Gross Spread Management
Fee Underwriting
Fee Selling
Concession Gross
Spread Management
Fee Underwriting
Fee Selling
Concession
Ln(MktCap) -0.185 -0.027 -0.044 -0.054
(-1.59) (-1.02) (-1.59) (-0.79)
DLowMktCap 0.453** 0.108** 0.097* 0.304
(2.31) (2.17) (1.92) (2.62) Rated 0.218 0.067 0.068* 0.088
(1.21) (1.81) (1.72) (0.87) LOC -0.062 -0.009 -0.004 -0.051 -0.048 -0.008 -0.001 -0.046 (-0.48) (-0.39) (-0.14) (-0.69) (-0.36) (-0.31) (-0.02) (-0.60)
Ln(StockVol) 0.038 -0.053 -0.022 0.001
(0.17) (-1.05) (-0.42) (0.01) PriorLend 0.090 0.034 0.036 0.047 0.050 0.030 0.030 0.024 (0.69) (1.13) (1.18) (0.59) (0.39) (0.99) (0.99) (0.31)
UPREIT -0.178 -0.063** -0.042 -0.108 -0.202 -0.070** -0.049* -0.119 (-1.31) (-2.25) (-1.40) (-1.23) (-1.46) (-2.51) (-1.65) (-1.33)
PrevSEOs -0.019 -0.014 -0.003 0.001 -0.070 -0.020 -0.013 -0.020 (-0.21) (-0.70) (-0.17) (0.03) (-0.84) (-1.08) (-0.71) (0.69)
Transparency -0.327 -0.084 -0.050 -0.279* -0.078 -0.047 -0.001 -0.163 (-1.30) (-1.46) (-0.84) (-1.73) (-0.32) (-0.84) (-0.01) (-1.06)
Post1990 0.249 0.028 0.043 0.157
(1.46) (0.82) (1.27) (1.51) Ln(TotProceeds) 0.334*** 0.047*** 0.053*** 0.114** 0.307*** 0.038** 0.044** 0.105** (4.11) (2.79) (2.82) (2.31) (3.88) (2.33) (2.43) (2.21)
Ln(Turnover) -0.261** -0.070** -0.083** -0.166** -0.203* -0.067*** -0.073** -0.143* (-2.30) (-2.78) (-3.11) (-2.42) (-1.84) (-2.67) (-2.89) (-2.18)
Ln(SharePrice) -0.718*** -0.138*** -0.145*** -0.398*** -1.009*** -0.168*** -0.199*** -0.515*** (-4.18) (-3.75) (-3.52) (-3.75) (-6.21) (-4.85) (-5.35) (-5.10)
Rank 0.143** 0.029 0.031* 0.065 0.116 0.026 0.026* 0.049 (2.03) (1.58) (1.96) (1.63) (1.62) (1.42) (1.68) (1.20)
MultiBook 0.583** 0.082 0.131** 0.301** 0.484* 0.065 0.111* 0.247 (2.28) (1.31) (2.26) (2.02) (1.76) (1.00) (1.83) (1.57)
Shelf -0.157 -0.023 -0.016 -0.106
(-1.12) (-0.72) (-0.49) (-1.21)
37
Discount -0.131 -0.021 0.022 -0.063 -0.304 -0.072 -0.027 -0.134 (-0.27) (-0.17) (0.17) (-0.23) (-0.66) (-0.61) (-0.22) (-0.51) Ln(REITProceeds) -0.228*** -0.035* -0.059*** -0.067 -0.252*** -0.038** -0.063*** -0.080* (-3.05) (-1.96) (-2.94) (-1.58) (-3.49) (-2.19) (-3.20) (-1.97)
Hotel -0.355 0.006 -0.065 -0.279 -0.234 0.019 -0.046 -0.201 (-1.55) (0.12) (-1.41) (-1.74) (-1.08) (0.35) (-1.04) (-1.32)
Industrial -0.324 -0.066 -0.041 -0.257 -0.201 -0.041 -0.013 -0.193 (-1.12) (-1.08) (-0.72) (-1.51) (-0.72) (-0.71) (-0.24) (-1.16)
Office -0.014 0.021 0.013 -0.056 0.027 0.027 0.019 -0.019 (-0.07) (0.46) (0.32) (-0.39) (0.13) (0.57) (0.45) (-0.14)
Residential 0.182 0.068 0.070 0.050 0.249 0.087* 0.088** 0.091 (0.93) (1.52) (1.59) (0.39) (1.37) (1.94) (2.33) (0.77)
Retail -0.033 0.005 -0.020 -0.053 -0.005 0.018 -0.010 -0.037 (-0.17) (0.14) (-0.52) (-0.43) (-0.03) (0.44) (-0.26) (-0.32)
Storage -0.287 -0.061 -0.055 -0.222 -0.268 -0.048 -0.046 -0.207 (-0.97) (-0.91) (-0.86) (-1.22) (-0.80) (-0.68) (-0.64) (-1.06)
R-Sq 0.358 0.254 0.309 0.261 0.333 0.232 0.285 0.237 N 454 454 454 454 454 454 454 454
This table presents pooled OLS regressions predicting REIT investment banking fees. The sample consists of 460 firm-commitment REIT SEOs conducted by 144 unique REITs
over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price
and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting
fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the
number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of
market capitalization, 0 otherwise.Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise.LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0
otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the
underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. UPREIT equals 1 if the firm uses an operating partnership structure, 0 otherwise. PrevSEOs is
the number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable
that takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of
the average monthly stock volume divided by number of shares outstanding over 12 months prior to the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock
price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that equals
1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer price
discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3
months prior to the SEO. Hotel, Industrial, Office, Residential, Retail, and Storage are dummy variables representing property focus classifications. Other is the reference case.
Unreported standard errors are heteroskedasticity consistent and cluster by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity
intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
38
Table 5.Random Effects Model
Independent Variables
Gross Spread Management
Fee Underwriting
Fee Selling
Concession Gross Spread Management
Fee Underwriting
Fee Selling
Concession
Ln(MktCap) -0.185 -0.027 -0.044 -0.054
(-1.49) (-0.95) (-1.57) (-0.73) DLowMktCap 0.453* 0.108* 0.097* 0.304*
(1.65) (1.70) (1.56) (1.84) Rated 0.218 0.067 0.068* 0.088
(1.28) (1.70) (1.76) (0.86) LOC -0.062 -0.009 -0.004 -0.051 -0.048 -0.008 -0.001 -0.046 (-0.43) (-0.28) (-0.12) (-0.59) (-0.33) (-0.23) (-0.02) (-0.53)
Ln(StockVol) 0.038 -0.053 -0.022 0.001
(0.13) (-0.80) (-0.34) (0.01) PriorLend 0.090 0.034 0.036 0.047 0.050 0.030 0.030 0.024 (0.68) (1.09) (1.19) (0.59) (0.38) (0.97) (1.01) (0.30)
UPREIT -0.178 -0.063* -0.042 -0.108 -0.202 -0.070* -0.049* -0.119 (-1.10) (-1.66) (-1.13) (-1.11) (-1.24) (-1.85) (-1.32) (-1.22)
PrevSEOs -0.019 -0.014 -0.003 0.001 -0.070 -0.020 -0.013 -0.020 (-0.24) (-0.77) (-0.19) (0.03) (-0.88) (-1.11) (-0.72) (0.42)
Transparency -0.327 -0.084 -0.050 -0.279* -0.078 -0.047 -0.001 -0.163 (-1.17) (-1.29) (-0.79) (-1.66) (-0.29) (-0.76) (-0.01) (-1.02)
Post1990 0.249 0.028 0.043 0.157
(1.50) (0.73) (1.14) (1.58) Ln(TotProceeds) 0.334*** 0.047*** 0.053*** 0.114** 0.307*** 0.038* 0.044** 0.105** (3.76) (2.26) (2.64) (2.14) (3.51) (1.89) (2.24) (2.01)
Ln(Turnover) -0.261** -0.070** -0.083** -0.166** -0.203 -0.067** -0.073*** -0.143* (-2.03) (-2.33) (-2.85) (-2.16) (-1.64) (-2.32) (-2.62) (-1.93)
Ln(SharePrice) -0.718*** -0.138*** -0.145*** -0.398*** -1.009*** -0.168*** -0.199*** -0.515*** (-3.21) (-2.65) (-2.86) (-2.96) (-5.94) (-4.26) (-5.16) (-5.06)
Rank 0.143** 0.029* 0.031** 0.065 0.116* 0.026 0.026* 0.049 (2.06) (1.82) (1.97) (1.55) (1.67) (1.64) (1.70) (1.18)
MultiBook 0.583** 0.082 0.131** 0.301** 0.484* 0.065 0.111* 0.247 (2.20) (1.33) (2.18) (1.89) (1.82) (1.06) (1.84) (1.56)
Shelf -0.157 -0.023 -0.016 -0.106
(-0.84) (-0.53) (-0.39) (-0.94) Discount -0.131 -0.021 0.022 -0.063 -0.304 -0.072 -0.027 -0.134
39
(-0.20) (-0.14) (0.15) (-0.16) (-0.47) (-0.49) (-0.19) (-0.35)
Ln(REITProceeds) -0.228*** -0.035 -0.059*** -0.067 -0.252*** -0.038* -0.063*** -0.080 (-2.31) (-1.56) (-2.65) (-1.13) (-2.57) (-1.70) (-2.85) (-1.37)
Hotel -0.355 0.006 -0.065 -0.279* -0.234 0.019 -0.046 -0.201 (-1.32) (0.11) (-1.07) (-1.72) (-0.90) (0.32) (-0.79) (-1.28)
Industrial -0.324 -0.066 -0.041 -0.257 -0.201 -0.041 -0.013 -0.193 (-1.06) (-0.94) (-0.60) (-1.41) (-0.67) (-0.59) (-0.19) (-1.07)
Office -0.014 0.021 0.013 -0.056 0.027 0.027 0.019 -0.019 (-0.06) (0.40) (0.27) (-0.41) (0.12) (0.52) (0.37) (-0.14)
Residential 0.182 0.068 0.070 0.050 0.249 0.087 0.088* 0.091 (0.75) (1.21) (1.27) (0.34) (1.06) (1.60) (1.65) (0.65)
Retail -0.033 0.005 -0.020 -0.053 -0.005 0.018 -0.010 -0.037 (-0.15) (0.11) (-0.42) (-0.41) (-0.03) (0.36) (-0.21) (-0.29)
Storage -0.287 -0.061 -0.055 -0.222 -0.268 -0.048 -0.046 -0.207 (-0.86) (-0.79) (-0.73) (-1.11) (-0.80) (-0.62) (-0.61) (-1.03)
R-Sq (Overall) 0.358 0.254 0.309 0.261 0.333 0.232 0.285 0.237 R-Sq (Within) 0.313 0.200 0.260 0.202 0.295 0.185 0.240 0.185 R-Sq(Between) 0.396 0.326 0.319 0.351 0.342 0.271 0.303 0.306 N 454 454 454 454 454 454 454 454
This table presents random effects regressions predicting REIT investment banking fees.The sample consists of 460 firm-commitment REIT SEOs conducted by 144 unique REITs
over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price
and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting
fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the
number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of
market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0
otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the
underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. UPREIT equals 1 if the firm uses an operating partnership structure, 0 otherwise. PrevSEOs is
the number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable
that takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of
the average monthly stock volume divided by number of shares outstanding over 12 months prior to the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock
price on the day prior to SEO issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that
equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer
price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3
months prior to the SEO. Hotel, Industrial, Office, Residential, Retail, and Storage are dummy variables representing property focus classifications. Other is the reference case.
Unreported standard errors are heteroskedasticity consistent and cluster by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity
intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
40
Table 6.Univariate Evidence on Differences in Direct SEO Costs: REITs versus non-REITs
Firm Type N Gross Spread (%) Management
Fee(%)
Underwriting Fee(%) Selling
Concession(%)
Non-REIT 460 5.219 1.076 1.103 3.040
REIT 460 4.647 0.911 0.944 2.569
Difference in
Means (T-
statistics)
6.87***
8.37***
8.42***
10.08***
This table compares the mean gross spreads of REIT SEOs with Industrial SEOs, where industrial SEOs are matched based on issue date and proceeds. GrossSpread is the total
dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price and the price at which the underwriting syndicate buys
shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is
selling concessions divided by total proceeds. T-statistics are calculated assuming unequal variances. *** denotes statistical significance at the 1% level.
41
Table 7 Multivariate Evidence (OLS) on Differences in Direct SEO Costs: REITs versus non-REITs
Independent Variables
Gross Spread Management
Fee Underwriting
Fee Selling
Concession Gross Spread Management
Fee Underwriting
Fee Selling
Concession
Ln(MktCap) -0.388*** -0.069*** -0.080*** -0.183***
(-5.24) (-4.24) (-4.60) (-4.27)
DLowMktCap 0.357*** 0.089*** 0.081** 0.196**
(2.45) (2.66) (2.17) (2.38) Rated 0.110 0.048* 0.030 0.057
(0.86) (1.90) (1.09) (0.78) Ln(StockVol) 0.240*** 0.061*** 0.057*** 0.125***
(3.89) (4.46) (3.98) (3.65) PriorLend -0.006 0.005 0.006 -0.013 -0.062 -0.005 -0.005 -0.043 (-0.07) (0.25) (0.30) (-0.23) (-0.64) (0.23) (0.22) (-0.76)
PrevSEOs -0.031 -0.011 -0.005 -0.008 -0.152* -0.032** -0.030** -0.069 (-0.42) (-0.71) (-0.36) (-0.19) (-2.16) (-2.11) (-2.00) (-1.63)
Transparency -0.497** -0.122** -0.094* -0.353** -0.025** -0.044** 0.002 -0.113 (-2.08) (-2.33) (-1.69) (-2.40) (-0.11) (-0.88) (0.05) (-0.79)
Ln(TotProceeds) 0.161** 0.013 0.016 0.037 0.024** -0.013 -0.013 -0.028 (2.55) (0.97) (1.11) (1.02) (0.38) (0.99) (-0.90) (-0.80)
Ln(Turnover) -0.218*** -0.043*** -0.059*** -0.129*** -0.099*** -0.017 -0.032* -0.069 (-3.13) (-3.31) (-3.63) (-3.15) (-1.22) (-1.18) (-1.89) (-1.45)
Ln(SharePrice) -0.299*** -0.074*** -0.046* -0.149** -0.933*** -0.196*** -0.182* -0.463** (-2.97) (-3.40) (-1.85) (-2.55) (-10.89) (-9.97) (-8.79) (-9.45)
Rank 0.060 -0.001 0.005 0.043** -0.001 -0.013 -0.007 0.012 (1.59) (-0.16) (0.55) (2.00) (-0.01) (-1.26) (-0.69) (0.53)
MultiBook 0.201 0.032 0.057 0.071 0.136 0.020 0.043 0.040 (1.08) (0.78) (1.40) (0.66) (0.68) (0.48) (1.01) (0.36)
Shelf 0.036 0.014 0.008 -0.012
(0.33) (0.58) (0.32) (-0.19) Discount 0.217 -0.001 0.017 0.197 0.161 -0.017 0.005 0.168 (0.79) (-0.03) (0.32) (1.14) (0.75) (-0.36) (0.10) (1.22)
Ln(MktProceeds) -0.175*** -0.031** -0.046** -0.045 -0.263*** -0.048** -0.065** -0.091*** (-2.85) (-2.24) (-2.98) (-1.33) (-4.61) (-3.58) (-4.52) (-2.83)
REIT -1.120*** -0.311*** -0.292*** -0.699*** -0.603*** -0.178*** -0.168*** -0.445*** (-4.37) (-5.47) (-4.72) (-4.84) (-3.23) (-4.47) (-3.92) (-4.09)
42
R-Squared 0.366 0.344 0.347 0.339 0.292 0.286 0.283 0.282 N 890 889 890 890 890 889 890 890
This table presents pooled OLS regressions testing for differences in investment banking fees across REIT and non-REIT SEOs. Industrial SEOs are matched based on issue date
and proceeds. Note that the sample is not the same as in Table 1 because matching non-REITs are included here. GrossSpread is the total dollar fees paid to investment banks
divided by total proceeds, where the dollar fee is the difference between the offer price and the price at which the underwriting syndicate buys shares from the issuer.
ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided
by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number of shares multiplied by share price (SharePrice) on the day prior to SEO
issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit
rating, 0 otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the
underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. PrevSEOs is the number of SEOs in the previous year. Transparency is 1 minus the proportion
of explained variation from the expanded market model regression. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of
the average monthly stock volume divided by number of shares outstanding over 12 months prior to the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock
price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that equals
1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise.Discount is the offer price
discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(MktProceeds) is the total SEO proceeds raised by all REITs and Industrials over the 3 months
prior to the SEO in question. REIT is an indicator variable that equals 1 if the observation is a REIT, 0 otherwise. Unreported standard errors are heteroskedasticity consistent and
clustered by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity intercepts are not reported. ***, **, and * denote statistical significance
at the 1%, 5%, and 10% levels, respectively.
43
Table 8.Multivariate Evidence (Random Effects) on Differences in Direct SEO Costs: REITs versus non-REITs
Independent Variables
Gross Spread Management
Fee Underwriting
Fee Selling
Concession Gross Spread Management
Fee Underwriting
Fee Selling
Concession
Ln(MktCap) -0.388*** -0.069*** -0.080*** -0.183***
(-6.00) (-4.59) (-5.27) (-4.82) DLowMktCap 0.357*** 0.089*** 0.081*** 0.196**
(2.66) (2.85) (2.57) (2.49) Rate 0.110 0.048* 0.030 0.057
(1.06) (1.99) (1.25) (0.93) Ln(StockVol) 0.240*** 0.061*** 0.057*** 0.125***
(3.76) (4.10) (3.81) (3.33) PriorLend -0.006 0.005 0.006 -0.013 -0.062 -0.005 -0.005 -0.043 (-0.07) (0.27) (0.34) (-0.26) (-0.69) (-0.25) (-0.25) (-0.83)
PrevSEOs -0.031 -0.011 -0.005 -0.008 -0.152** -0.032** -0.030** -0.069* (-0.52) (-0.84) (-0.41) (-0.24) (-2.44) (-2.27) (-2.11) (-1.91)
Transparency -0.497** -0.122* -0.094* -0.353** -0.025 -0.044 0.002 -0.113 (-2.26) (-2.40) (-1.80) (-2.72) (-0.12) (-0.88) (0.05) (-0.88)
Ln(TotProceeds) 0.161*** 0.013 0.016 0.037 0.024 -0.013 -0.013 -0.028 (2.84) (1.00) (1.19) (1.12) (0.43) (-1.04) (-0.98) (-0.88)
Ln(Turnover) -0.218*** -0.043*** -0.059*** -0.129*** -0.099* -0.017 -0.032*** -0.069** (-4.01) (-3.42) (-4.58) (-4.04) (-1.86) (-1.43) (-2.58) (-2.24)
Ln(SharePrice) -0.299*** -0.074*** -0.046* -0.149** -0.933*** -0.196*** -0.182*** -0.463*** (-2.96) (-3.18) (-1.95) (-2.50) (-11.61) (-10.65) (-9.65) (-9.92)
Rank 0.060* -0.001 0.005 0.043** -0.001 -0.013 -0.007 0.012 (1.73) (-0.20) (0.68) (2.11) (-0.01) (-1.63) (-0.87) (0.58)
MultiBook 0.201 0.032 0.057 0.071 0.136 0.020 0.043 0.040 (1.22) (0.85) (1.47) (0.73) (0.79) (0.52) (1.07) (0.40)
Shelf 0.036 0.014 0.008 -0.012
(0.34) (0.57) (0.34) (-0.19) Discount 0.217 -0.001 0.017 0.197 0.161 -0.017 0.005 0.168 (0.77) (-0.02) (0.26) (1.18) (0.55) (-0.26) (0.08) (0.98) Ln(MktProceeds) -0.175*** -0.031** -0.046** -0.045 -0.263*** -0.048** -0.065** -0.091*** (-3.01) (-2.29) (-3.34) (-1.32) (-4.36) (-3.53) (-4.62) (-2.62)
REIT -1.120*** -0.311*** -0.292*** -0.699*** -0.603*** -0.178*** -0.168*** -0.445*** (-4.93) (-5.89) (-5.43) (-5.23) (-3.42) (-4.41) (-4.07) (-4.35)
R-Sq (Overall) 0.366 0.344 0.347 0.339 0.292 0.286 0.283 0.282
44
R-Sq (Within) 0.266 0.138 0.198 0.162 0.203 0.093 0.132 0.107 R-Sq (Between) 0.408 0.440 0.369 0.414 0.267 0.286 0.259 0.304 N 890 889 889 890 890 889 889 890
This table presents random effects regressions testing for differences in investment banking fees across REIT and non-REIT SEOs. Industrial SEOs are matched based on issue
date and proceeds. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price and the
price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees
scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number
of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable that is set equal to 1 if the firm is in the lowest decile of market
capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns
over the 12 months prior to the SEO issue date. PriorLend equals 1 if the underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. PrevSEOs is the
number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Ln(TotProceeds) is the natural
logarithm of SEO issuance proceeds.Ln(Turnover) is the natural logarithm of the average monthly stock volume divided by number of shares outstanding over 12 months prior to
the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter
and Manaster’s reputation measure. MultiBook is a binary variable that equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if
the offer is registered under Rule 415, 0 otherwise. Discount is the offer price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(MktProceeds) is the
total SEO proceeds raised by all REITs and Industrials over the 3 months prior to the SEO in question. REIT is an indicator variable that equals 1 if the observation is a REIT, 0
otherwise. Unreported standard errors are heteroskedasticity consistent and clustered by issuer. T-statistics are in parentheses. All regression models include year dummies. For
brevity intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.
45
Endnotes
1Prior to 2001, the dividend payout mandate was 95% of taxable income.
2 Despite the large payout requirement, most REITs choose to pay additional discretionary dividends, further reducing their ability to accumulate
capital internally (Wang, Erickson, and Gau (1993)). The minimum dividend is not binding due to depreciation expense, which coupled with capital
gains on property sales, allows REITs to pay dividends in excess of taxable income, as shown by Bradley, Capozza, and Seguin (1998), Ghosh and
Sirmans (2006), Feng, Ghosh, and Sirmans (2007b), and Hardin and Hill (2008). Although, REITs have some discretion when choosing their degree
of financial constraint, the mandatory dividend precludes these firms from pursuing meaningful growth given the capital intensity of the industry.
3Recent research by Riddiough and Wu (2009), Hardin and Wu (2010), and Hardin and Hill (2011) examine the interaction between short-term debt
offerings and long-term sources of financing. Francis, Lys and Vincent (2004) show that REITs access capital markets more frequently than
industrial firms.
4 Reduced agency problems are attributable to the industry's high payouts to shareholders, while the latter point results from asset and income
restrictions that limit REITs to invest primarily in real estate.
5 In addition, REITs may provide an improved identification strategy by mitigating the potential endogenous nature of adverse selection problems.
Previous studies generally conclude that information asymmetry drives a substantial portion of SEO gross spreads but asymmetric information is not
directly observable, hence proxies vary across studies. Furthermore, these proxies may not be exogenous from omitted variables nor cross-industry
shocks (Lee and Masulis (2009). This endogeneity problem should be most severe in industries investing heavily in intangible assets and for firms
with greater free cash flow where both characteristics aggravate the adverse selection problem clouding causal inferences with respect to existing
gross spread determinants. Structural differences between equity REITs and non-REITs may attenuate the endogeneity concern. Later in the text, it is
noted that the relative REIT transparency argument is unresolved.
6Hardin and Hill (2011) examine the determinants of REIT line of credit rating and use and find that most publicly-traded equity REITs have access
to credit lines.
7Chou, Hardin, Hill, and Kelly (2011) find evidence of market value implications of the partnership structure for REITs. The market values of
discretionary dividends paid by REITs using the partnership structure, relative to non-OP REITs.
8The expanded market model is defined as: r i,k,t= α i,t + β1* r m,t + β2* r j,t+ β3* rk,t+ ε i,t,
where r i,k,t is the monthly return of REIT I in property k in year t, r m,t is the monthly CRSP value-weighted market return in year t, r j,t is the
monthly value-weighted return of the equity REIT’s industry in year t, and rk,t is the monthly value-weighted return of the equity REITs in property
k in year t.
46
9Only 51 unique lead investment banks underwrote REIT SEOs between 1990 and 2007.
10
Consistent with this, Choe, Masulis and Nanda (1993) find that price reactions to industrial equity offerings are lower during high financing activity
in the market. Furthermore, Goodwin (2011) finds a negative relation between underpricing of REIT SEOs and primary market activity.
11
Discounting measures the difference between closing price on the day prior to the SEO issue date and offer price. On the other hand, underpricing
is defined as the difference between the closing price on the issue date and offer price. Discounting and underpricing are analogous, and represent the
indirect costs associated with SEOs (Altinkilic and Hansen (2003).
12
Lease, Masulis, and Page (1991) shows that stated offer dates are often not accurate since most offers actually take place after the trading is closed.
Following Safieddine and Wilhelm (1996), corrections to the offer dates provided in Securities Data Corporation (SDC) New Issues Database are as
follows. If the trading volume on day following the reported offer date is (1) more than twice the trading volume on the offer data on SDC and (2)
more than twice the average daily trading volume over the previous 250 trading days, then the trading day after the reported offer day on SDC is
selected as the corrected offer date. This methodology results in offer date corrections for 54% of the sample.
13
Goodwin (2011) argues that discounting is a more appropriate measure of the indirect cost of issuance when analyzing SEOs. Thus, discounting is
used as a proxy to capture indirect cost of SEOs. However, the results are qualitatively similar when the models are run again with the underpricing
variable taking the place of the discounting. An anonymous referee provided this point.
14
SEOs are typically underwritten by syndicates of managing, underwriting, and selling groups. The managing group is responsible for structuring
the syndicate, and typically receives 20% of gross spread for its services. Along with the managing group, underwriting group make an underwriting
commitment for an agreed upon number of shares, and conduct the bookbuilding process. For these services, underwriters also generally receive 20%
of the gross spread. Finally, managing underwriters also assemble a selling group, and typically gets 60% of the gross spread for selling the shares to
retail as well as institutional customers. While 20/20/60 division is perceived as widely standard in the industrial literature, Torstilla (2001) finds
significant deviations from 20/20/60 split for industrial IPOs. Similarly, untabulated results show that only 103 out of 460 REIT SEOs provide a
20/20/60 split.
15
The specific source used here is REIT Watch, NAREIT’s monthly statistical report that lists firm name, ticker, investment focus, and property
focus for equity, mortgage, and hybrid REITs comprising their REIT return indices.
16
In a firm commitment contract, a syndicate of investment banks guarantees to buy an issuer’s equity offering at an offer price discount. The
discount is compensation for bearing the price risk associated with reselling the shares to the public following the agreement. This compensation or
discount is called underwriter gross spread, and represents a substantial portion of total flotation costs (Lee and Masulis (2009)).
47
17
It should be noted that SNL does not provide historical data on REITs' use of the UPREIT structure, as SNL backfills the UPREIT field. Thus,
when one pulls the UPREIT variable for a time-series, the researcher will note that the variable exhibits no within-REIT variation. An anonymous
reviewer indicated this to the authors.
18
Goodwin (2011) shows a significantly lower level of discounting for REIT SEOs during periods of high financing activity in the overall market.
19
Data on the breakdown of investment bank fees is also retrieved from the Securities Data Corporation (SDC) New Issues Database.
20
Because of the tradeoff between bias and efficiency, emphasis is given to the result from the full model. That is, since the primary concern is
omitted variables bias, relative to less efficient standard errors, results shown across columns 1 and 4 receive emphasis. This approach parallels
Greene’s (2007) “general-to-simple” modeling strategy (pages 136-137).
21
Chan, Stohs and Wang (2001) find no statistical difference between REITs and non-REITs for a sample of REIT IPOs listed in Hong Kong Stock
Exchange.
22
Results are qualitatively and quantitatively similar when excluding industrial SEOs from the computation of total SEO proceeds.
23
Specifically, Transparency for industrials is defined as ri,,t= α i,t + β1* r m,t+ ε i,t where r i,k,t is the monthly return of the non-REIT issuer in year t,
and rm,t is the monthly CRSP value-weighted market return.
24
This suggestion was provided by an anonymous reviewer.
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