Shareholder Wealth Effects Of Real Estate Finance Mergers - An Empirical Assessment

The real estate finance industry has experienced significant consolidation since the early 1990s and continues to change rapidly through mergers and acquisitions. But are these transactions creating value for the respective shareholders as they should? Interestingly, despite ongoing consolidation activity and despite the sheer size as well as the importance of the industry hardly any empirical research analyses the value implications of acquisitions in the real estate finance sector up to now. Additionally, the few existing studies suffer from small sample sizes. As a consequence the question still remains whether acquisitions in the real estate finance sector do create value for the target as well as for the bidding firms' shareholders. This study aims to fill this gap in the literature by assessing the value implications of a large sample of 194 domestic and cross boarder M&A deals of exchange listed real estate finance institutions between the years 1991 and 2005. To assess the value implications we use event study methodology and apply the market model to compute expected returns. We find that shareholders of the target on average experience a significant positive revaluation of their shares whereas the positive wealth effects for bidding firmsí shareholders are smaller and insignificant. This implies that M&A in the real estate finance sector are wealth creating for the combined entity. These findings also provide an interesting argument for the present discussion on a 10% cap on shareholdings in REITs.