Do REITs' Stock Prices Reflect Financial Information? Evidence from European REITs

There is a large amount of evidence that stock prices are predictable, some research shows that stock prices appear to drift after important corporate events for up to several months (Fama (1998)). Indeed, stock prices rather than adjusting immediately to news information often tend to drift over time. Previous literature suggests several explanations for its existence and persistence in the general stock market. For instance, the persistence of this anomaly may be due to high transaction costs (limits of arbitrage), alternatively, the drift may be a function of the type of information agents receive. The information content of public events and of financial statements is extremely relevant for REITs since real estate assets are traded infrequently and the market has incomplete information about their true value. In this paper, we look at stock returns after major public announcements and stock return reaction to disclosure of accounting information for a sample of European REITs from 2000-2011. Precisely, we first investigate how REIT market prices are affected by public announcements at corporate level; and then, we focus the attention on the ability of accounting information, such as accounting-based performance measures, to be informative for investors as reflected in stock return. We investigate price reactions over both short and long windows to assess whether the REIT disclosures are not only useful for explaining security returns but whether they are in fact used by investors (Easton, 1998). Finally, we investigate which market and firm characteristics effect the stock returns' reaction to information disclosure. For instance, we look at whether the number of investment analysts following a REIT effects on the speed of adjustment of the firm's stock price to new information. We expect that, ceteris paribus, REITs that are followed by many analysts react more promptly to new information than those of firms that are followed by fewer analysts.