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Short Sales and Fundamental Value: Explaining the REIT Premium to NAV |
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| Authors: | Dirk Brounen David C. Ling Melissa Porras Prado |
| Affiliation: | 1. Department of Economics, Tilburg University, , The Netherlands;2. Warrington College of Business, University of Florida, , Gainesville, FL, 32611;3. Nova School of Business and Economics, Universidade Nova de Lisboa, , 1099‐032 Lisbon, Portugal |
| Abstract: | This study explores the role of short sale constraints in explaining the variation in premiums to Net Asset Value (NAV) in REIT pricing. We use proprietary information on short sales between June 2006 and September 2008 to examine how short sales and short sale constraints affect the variation in monthly REIT NAV premiums using panel vector autoregression models. We find that variation in short sale activity across individual REITs can account for at least one‐third of the variation in NAV premiums. Short sale constraints tend to be binding when there is strong demand and limited supply of shares to short. Excess demand leads to overvaluation and the correction of the overvaluation explains the under‐performance of premium REITs. |
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