Blinded by Familiarity? Institutional Investors under Adverse Performance Shocks

Institutional investors’ irrational familiarity bias can dominate their information advantage under adverse performance shocks to the home assets in their portfolios. Using data of U.S. REITs from 1993 to 2015 and the events of public non-REIT firm acquisitions, this paper investigates how institutional investors react to the geography-specific shocks to home assets. Equity REITs perform worse if they hold more properties in counties where the acquired non-REIT firms are located. Ifthe value of properties that a REIT owns in the target county increases by 10 percentage points, its abnormal return (alpha) decreases by 14.7% in one month after the acquisition announcement. This negative impact is more prominent if the REIT owns more offices than other types of properties in the county, or if the acquired firms are larger than other remaining public firms in the county. Also, the REIT’s return on asset and dividend yield decrease by 6.4% and 5.4% in the next quarter. However, using a difference-in-differences model, I find that institutional home investors are less likely than institutional non-home investors to lower the holdings of affected REITs after the acquisitions. This familiarity bias is stronger if the investors are closer to the affected properties or implement more active investment strategies.