Are REIT Dividend Changes a Firm-Specific or an Industry-Level Signal? Evidence From the Decomposition of Stock Returns

Abstract

This study examines the firm-specific and industry-level effects of dividend announcements by equity real estate investment trusts (REITs). Using stock returns to measure the information impounded in stock prices from dividend announcements, we decompose stock returns into three return components: firm-specific, industry-level, and market-wide. This decomposition allows us to examine the relative importance of the firm-specific and industry-level information contained in dividend announcements. We find that the market reaction to equity REIT dividend changes is mainly driven by the firm-specific return component. We also find that equity REIT managers are more likely to cut (raise) dividend payments when the stock price reveals less (more) firm-specific information. Moreover, the managerial dividend signal can explain the announcement-period firm-specific abnormal return but not the industry-wide abnormal return, suggesting that the managerial dividend signal conveys mainly firm-specific information.

Keywords:

• REIT dividend changes
• managerial signal
• firm-specific information
• industry-level information

Acknowledgments

We are grateful to Ye Wang and seminar participants at 2018 Financial Management Association Annual Meeting for helpful comments. Pan acknowledges financial support from the College of Business, Shippensburg University.

Notes

1 For robustness check, we also conduct all the analyses by excluding data in 2009 and 2020. The results are qualitatively the same as those of the full sample.

2 In response to the 2008–2009 financial crisis, the Internal Revenue Service issued Revenue Procedure 2008–68 in December 2008 that allows REITs to issue elective stock dividends in lieu of cash dividends to satisfy the taxable income distribution. Devos et al. (2014) find that only 17 REITs issued elective stock dividends over the period 2009 to 2010. They also find that the REITs that issue elective stock dividends do not face immediate cash flow problems.

3 The equity REIT industry portfolio is a value-weighted equity REIT portfolio that excludes the announcing REIT j. The weight of each equity REIT is calculated daily. Consequently, the composition of the equity REIT industry portfolio is different for different announcing REIT j.

4 Mandatory dividends are 95% of before-tax net income prior to 2001 and are 90% thereafter.

5 There are eight property types: hotel, industrial, residential, office, retail, health care, diversified, and other.

6 The inverse Mills ratio is the ratio of the standard normal probability density function over the standard normal cumulative density function using the predicted values from Equation (7) as a probit model. The inverse Mills ratio calculated in this way is to approximate the probability that the explanatory variables fail to predict the dividend change decision (i.e., the failure rate) and is used to proxy for managerial information signal.

7 The numbers of negative-change announcements are 38, 17, 26, 50, 64, 30, 25, and 24 for hotel, industrial, residential, office, retail, health care, diversified, and other, respectively.

8 The results are not reported to save space but are available upon request.