Do REIT investors care? An investigation into the market response to the public release of SEC comment letter correspondences

ABSTRACT

The Securities and Exchange Commission (SEC) in the US reviews REIT financial statements at least every three years. In these reviews, it adopts the perspective of an investor in evaluating the disclosure of REITs and asks questions an investor would ask. If any disclosure deficiencies are identified, the SEC sends a comment letter to the REIT requesting clarification, more discussion or corrections/improvements in future filings. We investigate the response of REIT investors to the public release of comment letter correspondences between the SEC and publicly traded equity REITs as well as the impact of different types of SEC comments on this response. Using a sample of 395 comment letter correspondences for annual reports (10-Ks) over the period of 2006 to 2019, we find a negative stock market response. Business-related SEC comments are most important in explaining the market response, but only for less transparent REITs. Our results suggest that SEC comment letters may improve the information environment for certain types of REITs by providing new information relevant to forecasting future cash flows and/or signalling information about a REIT’s reporting quality.

KEYWORDS:

• REITs
• SEC comment letter
• financial statements
• information environment
• event study

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Further information on the mission, purpose and organisational structure, please see the SEC website on ‘What We Do’: https://www.sec.gov/Article/whatwedo.html.

2. SEC ‘Filing Review Process’: https://www.sec.gov/edgar/searchedgar/companysearch.html.

3. For further information on the comment letter review process, please see the SEC website on ‘Filing Review Process’: https://www.sec.gov/edgar/searchedgar/companysearch.html.

4. Once uploaded, investors gain access to the 10-K comment letter correspondences via the EDGAR website, please see: https://www.sec.gov/edgar/searchedgar/companysearch.html or https://www.sec.gov/edgar.shtml. EDGAR offers a public dissemination service that notifies subscribers of new filings.

5. See SEC compliance and disclosure interpretations on non-GAAP financial measures: https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

Additional information

Notes on contributors

Liesa Schrand

Liesa Schrand is an associate in Special Projects at Allianz Real Estate Germany. She holds a PhD in real estate from the University of Regensburg, IREBS International Business School (Germany). Her research includes corporate accounting and investor information, performance analysis and corporate governance topics of listed real estate vehicles.

Julia Freybote

Julia Freybote is an Assistant Professor of Finance and Real Estate in The School of Business at Portland State University in Portland, Oregon (USA) and an Extraordinary Associate Professor in the Department of Business Management at Stellenbosch University (South Africa). She holds a PhD in real estate from Georgia State University and her work has been published in journals such as Real Estate Economics, the Journal of Real Estate Research, Journal of Property Research and Journal of Real Estate Finance and Economics. Her research predominantly focuses on investor behaviour, information environment and asset pricing in the REIT and commercial real estate market.

Wolfgang Schaefers

Wolfgang Schaefers is a full professor at the University of Regensburg, IREBS International Business School (Germany), with main research interest in Real Estate Asset Pricing, Corporate Governance and Corporate/Public Real Estate Management. His research work has been frequently published in leading real estate journals including Journal of Real Estate Finance and Economics, Journal of Real Estate Research, Journal of European Real Estate Research, Journal of Property Investment and Finance, German Journal of Real Estate Research.