Analysis of REIT IPOs Using a Market Microstructure Approach: Anomalous Behavior or Asset Structure

In this research, we examine and present new evidence on the market activity following the initial public offering (IPO) of a real estate investment trust (REIT) using microstructure data. We analyze the bid-ask spread differences for REIT securities compared to common stocks and closed-end funds for all IPOs between 1985 and 1988. Our results show that REITs, as a whole sample, experience significantly greater bid-ask spreads immediately following the IPO compared to common stocks and funds. However, this outcome is driven by the equity REIT sample, with the mortgage REIT sample having significantly smaller bid-ask spreads. This is in contrast to the evidence documented by Nelling, Mahoney, Hildebrand, and Goldstein (1995). We attribute our result to the underlying asset structure (such as equity, hybrid, and mortgage portfolios) of the various REITs. Overall, however, we find that bid-ask spreads for REITs are similar to those of common stock when both asset structure and the traditional determinants of the spread (share price, trade volume, and returns variance) are considered.