Investors’ Limited Attention: Evidence from REITs

This paper examines the degree to which the market prices of publicly traded firms reflect and respond to new information regarding the economic viability and vitality of organizations to which they are strategically linked. More specifically, we exploit the uniquely transparent nature of the lessor-lessee relationship across commercial real estate markets to evaluate whether future returns to real estate investment trusts (REITs) are systematically affected by the financial return performance and/or operational opacity of the tenants who lease their investment properties. Using a hand collected data set identifying the principal tenants of 96 publicly traded REITs, we find those firms with the best performing tenants generate annualized abnormal returns which are approximately six percentage points higher than those realized by REITs with the worst performing tenants. These results are robust to a variety of model specifications, and a closer inspection of the results reveals these performance differentials are consistent with emerging evidence across the literature suggesting investors’ limited attention materially influences the return predictability of assets. We thus conclude investors’ limited attention leads to the failure of REIT prices to fully reflect the valuation implications of their tenants’ return performance.