Discounting and Underpricing of REIT Seasoned Equity Offers

Abstract

For seasoned equity offerings, the discounting of the offer price from the closing price on the previous day is influenced by the level of asymmetric information surrounding the firm and the offering, as well as compensation to investors willing to purchase new shares. Discounting is important for the offering firm because it represents money left on the table, and this is the first paper to examine the degree of discounting and its determinants for real estate investment trusts (REITs). Studying the discounting of REIT seasoned equity offers from 1994 to 2006, this paper provides support for both the placement cost and value uncertainty hypotheses of discounting. When new REIT shares are more difficult to place with investors and there is less consensus about the valuation of REIT shares, investors will require greater discounting of the offer price.