ON THE DIRECT COSTS OF REIT SEOS - Johns Hopkins …pages.jh.edu/jrer/papers/pdf/forth/accepted/ON...

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ON THE DIRECT COSTS OF REIT SEOS

Sinan Gokkaya†

Ohio University

Matthew D. Hill††

University of Mississippi

G. Wayne Kelly†††

University of Southern Mississippi

First Draft: April 9, 2012

Revision Requested: May 27, 2012

Resubmitted: July 16, 2012

Keywords: REITs; SEOs; cost of equity; investment banking fees

†Sinan Gokkaya is an Assistant Professor of Finance at Ohio University. Electronic mail: [email protected].

†† Contact author Matthew D. Hill is an Assistant Professor at the University of Mississippi. Electronic mail:

[email protected]. †††

G. Wayne Kelly is an Associate Professor of Finance at University of Southern Mississippi. Electronic mail:

[email protected].

mailto:[email protected]

mailto:[email protected]

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ON THE DIRECT COSTS OF REIT SEOS

Abstract

This study examines the determinants of direct costs for REIT seasoned equity offerings. These

costs are not related to information asymmetries, unlike non-REIT firms. Gross spreads vary

inversely with stock liquidity, price, and industry activity. Concerning REIT-specific

heterogeneity, gross spreads are generally insensitive to property type and operating partnership

structure. Still, the findings suggest managers can influence costs as higher fees are directly

related to the use of underwriting syndicates and more reputable investment banks. Finally, a test

for differences in direct costs across REIT and comparable industrials shows significantly lower

direct issuance costs for REITs.

I. Introduction

Underwriters purchase shares from issuers at an offer price discount in a firm

commitment seasoned equity offering (SEO), which increases flotation costs that erode proceeds

from new equity issuance (Lee, Lochhead, Ritter, and Zhao (1996)). This discount is a direct cost

of equity issuance, providing compensation to investment banks for underwriting fees,

management fees, and selling concessions. For industrial firms, Lee and Masulis (2009) show

that direct costs of SEOs comprise 5-7% percent of capital raised via equity offerings and

represent the vast majority of total flotation costs. Eckbo, Masulis, and Norli (2007) conclude

that adverse selection problems contribute significantly to the magnitude of SEOs' direct costs.

This paper examines these direct costs for real estate investment trusts (REITs). REIT

equity issuance costs deserve separate attention due to the increasing size of the asset class

(Capozza and Seguin (2003)) and because of growing interest in the industry's financing

decisions (Ooi, Ong, and Li (2010)). The latter is attributable to REITs facing an exogenously

imposed financial constraint that forces heavy reliance on raising equity funds for property

investment. This constraint is the mandatory distribution of at least 90% of taxable income as

dividends, thereby providing their exemption from federal incomes taxes.1,2

Not surprisingly,

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REITs exhibit financial characteristics consistent with their limited ability to accumulate internal

capital (Ott, Riddiough and Yi (2005) and Hardin, Highfield, Hill, and Kelly (2009)). Thus,

REITs tend to make acquisitions with short-term debt, which is repaid with proceeds from long-

term financing (Brown and Riddiough (2003)).3 The importance of equity financing for REITs is

heightened further in that these firms have a competitive disadvantage in issuing debt because of

their tax-exempt status (Howe and Shilling (1988)). Consistent with this disadvantage, Ghosh,

Nag, and Sirmans (1999) show that REITs issue equity three times more frequently than debt and

that SEO proceeds are almost double those for debt issues.

Since net proceeds from SEOs provide REIT investment capital, minimizing issuance

costs is imperative. Direct costs of SEOs for the sample of equity REITs account for roughly

4.64% (Table 1) of issuance proceeds. Hence, gross spreads for REITs are materially important,

motivating this research.

The multivariate analysis suggests the direct cost of REIT SEOs is largely unrelated to

firm-level proxies for information asymmetry, a significant departure from the industrial SEO

literature. Direct costs vary inversely with recent activity in the overall REIT SEO market,

possibly indicating that weaker adverse selection problems in capital markets reduce REITs'

direct equity costs. Further findings imply that REITs with increased trading volume and stock

prices pay lower fees, suggesting these characteristics lower investment banks’ placement costs

(i.e., direct and indirect intermediation costs). Results also show that gross spreads increase with

the number of underwriters and underwriter reputation, consistent with investment banks earning

reputational rents from SEO underwriting.

In contrast to economies of scale arguments for industrial SEOs, per-unit direct costs of

REIT equity increases with total issue proceeds. Further results show that the direct cost of REIT

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equity is unrelated to discounting, suggesting investment banks do not jointly determine indirect

and direct underwriting fees for REIT equity issuers. Concerning REIT-specific heterogeneity,

differences in property focus and the use of operating partnerships generally do not influence

gross spreads. Further analysis reveals that the determinants of overall gross spreads also

determine individual components of direct costs (i.e., selling concessions and underwriting and

management fees).

These findings contribute to the literature as they provide insights to REIT managers on

the cost of equity capital. This study extends the overall SEO literature; focusing on REITs

mitigates problems associated with unobservable industry-specific heterogeneity. That is,

unaccounted for economic shocks that simultaneously influence the direct costs of SEOs for all

REITs should be a reduced concern for the present study because the sample is drawn from a

single industry.

This study also extends the literature by testing for differences in SEO direct costs across

REITs and matched non-REITs. This is an interesting component of the analysis because of the

growing debate on the relative transparency of REITs. From one perspective, REITs are

considered less subject to informational asymmetry due to reduced agency problems and fewer

strategic growth options that make market values less sensitive to human capital (Cannon and

Vogt (1995) and Feng, Ghosh, and Sirmans (2007a)).4,5

Furthermore, the tangibility of real estate

may reduce adverse selection costs for REIT investors relative to shareholders of industrial firms

that invest heavily in research and development expenditures. Alternatively, REITs may be less

transparent, as Han (2006) argues that real estate assets are illiquid and less transparent and

Campbell, Ghosh, and Sirmans (2001) state that income and ownership restrictions reduce the

effectiveness of the market for corporate control for REITs. Subsequently, REITs' unique

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operating environment provides an interesting laboratory for studies on equity issuance (Ghosh,

Nag, and Sirmans (1999 and 2000) and Hartzell, Kallberg, and Liu (2005 and 2008)).

Univariate and multivariate evidence here suggests REITs have significantly lower gross

spreads than comparable non-REITs. This finding is consistent with these firms’ unique

operating structure reducing uncertainty in pricing equity. Results suggesting lower direct costs

for REITs are in line with Dolvin and Pyles' (2009) findings showing smaller price revisions for

REIT IPOs.

Overall, the findings are consistent with the notion that REITs are more transparent than

non-REITs. Whether industrials are more or less opaque than REITs, REITs clearly have a

strong incentive to seek a high degree of transparency.

II. Theory and Model

Prior studies of the determinants of the investment banking fees that arise from issuing

equity provide the basic framework for this study of factors influencing the direct costs of REIT

SEOs. That basic framework is expanded to include the impact of variables specific to REITs.

2.1.1 Asymmetric information and Uncertainty

Many studies show that gross spreads vary directly with firm-level asymmetric

information and price uncertainty present at the time of security issuance. Since these

characteristics are not directly observable, most studies employ proxies for information

asymmetry and price uncertainty and these proxies may also capture other influences, such as

industry and index-specific factors (Lee and Masulis (2009)). Common proxies for information

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asymmetry include firm size, stock return volatility, prior lending relationship with the

underwriter, and availability of credit rating.

The first proxy for asymmetric information is firm size. Larger companies receive more

scrutiny from stock analysts and institutional investors so they necessarily exhibit less

information asymmetry than smaller firms (Livingston, Naranjo, and Zhou (2007). Indeed,

Butler, Grullon and Weston (2005) and Lee and Masulis (2009) find an inverse relation between

firm size and gross spread for industrial issuers.

Second, issuers’ ease of access to debt markets is generally considered a proxy for degree

of asymmetric information. Credit rating availability and whether or not the REIT has access to

private debt via revolving credit lines account for this effect.6 Liu and Malatesta (2006) find

lower gross spreads for industrial firms with higher credit ratings. The authors attribute this

finding to the information production function of public debt markets lowering adverse

selection costs. While the non-REIT SEO literature ignores access to credit lines, this is an

important variable for the present study as Hardin and Hill (2011) argue that REITs with access

to lines of credit undergo substantial bank monitoring. Further increasing the scrutiny provided

by private lenders, REITs are forced to manage liquidity via credit lines since they do not retain

meaningful levels of free cash flow (Hardin, Highfield, Hill, and Kelly (2009)).

Also associated with informational asymmetry is stock price volatility. Lee and Masulis

(2009) suggest that firms with more volatile stock returns face increased uncertainty, increasing

the value of investment banks’ guarantee in underwriting a firm commitment SEO. Butler,

Grullon and Weston (2005) and Lee and Masulis (2009) show positive relations between

investment bank fees and stock volatility for industrial issuers.

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Another important control is prior lending relationship with the underwriter. Drucker and

Puri (2005) argue that issuers benefit from informational economies of scope that result from

employing the same investment banks in repeat SEOs. Prior lending by an underwriter leads to

using the same client information for future financing and should therefore lower external

financing costs. Consistently, Drucker and Puri (2005) find that issuers employing the same

investment banks pay lower investment banking fees.

In addition to the proxies above that reflect existing SEO literature, the following controls

account for information asymmetry specific to the REIT industry: the operating partnership

structure, the number of SEOs in the previous year, corporate transparency, and a post-1990

REIT dummy.

Accounting for the use of operating partnership is important because the choice of

structure may induce information asymmetries. With operating partnerships, or more

specifically, umbrella partnerships (UPREITs), the limited partnership owns the properties while

the REIT owns a controlling interest in the partnership. Han (2006) argues that partnerships give

rise to conflicts of interest between common shareholders and operating partners because of

differences in marginal tax rates. Ling and Ryngaert (1997) and Downs, Guner, and Patterson

(2000) also state that partnerships increase information asymmetries, while Ghosh and Sirmans

(2003) note that partnerships may increase organizational complexity. Given these findings,

controlling for the partnership organizational structure is warranted because it may be related to

REIT information asymmetries, hence, direct costs of SEOs.7

Goodwin (2011) finds a significant inverse relation between REITs' indirect SEO costs

and the number of equity issues placed by industry participants in the previous year. This

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suggests that equity market participation results in information production and reduces value

uncertainty.

An, Cook, and Zumpano (2011) find a positive relation between corporate transparency

and firm growth for REITs, consistent with greater transparency lowering the cost of capital.

Following this study, the proportion of unexplained variation from expanded market model

regressions is employed to control for the transparency of REIT operations.8

Ghosh, Nag, and Sirmans (2000) argue that older REITs have more certain future prospects than

REITs going public post-1990 because the latter derive a greater proportion of their value from

growth options. Ghosh, Nag, and Sirmans (2000) find that REIT SEOs conducted post-1990 are

more underpriced than pre-1990 IPOs. Hence, whether or not the REIT went public after 1990 is

used as a final control for information asymmetry.

2.1.2 Placement Costs

Empirical evidence on economies of scale in industrial SEO investment banking fees is

mixed. Butler, Grullon, and Weston (2005) and Lee and Masulis (2009) find a significant

inverse relation between per unit investment bank fees and the total proceeds raised via SEOs.

This is consistent with economies of scale in SEOs, where the per-unit cost declines with issue

size. In contrast, increased issue size may raise the costs of underwriter certification,

monitoring, and marketing services, and diminish returns from these services. Thus, some

issuers may experience diseconomies of scale. Altinkilic, and Hansen (2000) find higher

marginal costs for larger issues and attribute this finding to issuers not choosing the level of

proceeds to minimize relative cost of the fees.

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2.1.3 Stock Liquidity and Price

Butler, Grullon, and Weston (2005) argue that the liquidity of a particular stock reduces

investment banks’ intermediation costs, including inventory costs, adverse selection risks, and

the sunk costs of processing transactions. Butler, Grullon and Weston (2005) also argue that

institutional investors tend to ignore firms with low-priced stocks. Thus, investment banks might

have more difficulty placing illiquid and low-priced issues, thereby increasing the investment

banks’ costs of new equity issues. Their empirical results support this argument showing that

investment banks charge lower fees to firms with higher priced and more liquid stocks.

2.1.4 Underwriter Reputation and Syndicates

In a competitive underwriting market, underwriters’ profitability comes from their ability

to reduce the costs of due diligence, enabling them to lower underwriting fees without reducing

profit (Lee and Masulis (2009)). However, if the underwriting market is oligopolistic, more

reputable underwriters could charge higher fees to underwrite an SEO (Gande, Puri, and

Saunders(1999).9 A competing theory offered by Mandelker and Raviv (1977) and Chemmanur

and Fulghieri (1994) argues that investment bank fees might simply reflect the surplus proceeds

generated for the issuer as a result of marketing during the roadshow conducted by the

underwriters. Both theories predict a positive relation between underwriter reputation and

investment bank fees. Fernando, Gatchev, May, and Megginson (2012) find this to be the case

in the underwriting of industrial SEOs. Furthermore, the gross fee might also decline with the

level of coordination as well as risk sharing between underwriters during an SEO and issuances

with multiple underwriters should be associated with smaller fees (Mandelker and Raviv

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(1977)). Consistently, Butler, Grullon, and Weston (2005) show that industrial SEOs written by

underwriting syndicates are associated with lower fees.

2.1.5 Primary Capital Market Activity

The degree of SEO activity in the primary capital market may influence investment

banking fees for firms accessing capital markets. Increased financing activity in the primary

market may lower the adverse selection costs in the overall market, reducing the cost of issuing

equity. However, increased primary market activity may instead reflect higher investor demand

for new equity offerings, leading to a crowding out effect that increases the costs of raising

external capital (Boudoukh and Whitelaw (1993)). Consistent with the latter, Altinkilic and

Hansen (2000) find a direct and significant relation between investment bank fees and the level

of financing activity in non-REIT primary market SEOs.10

2.1.6 Offer Method

Firms issuing shelf-registered equity via Rule 415 have two years to undertake the offer

after filing with the Securities and Exchange Commission (SEC). Thus, Rule 415 may increase

competition among potential underwriters, leading to lower banking fees. Supporting this

notion, Lee and Masulis (2009) and Autore and Kumar (2008) find significantly lower

underwriting fees for shelf-registered issues, as compared to fully marketed SEOs. Denis (1993)

argues that heterogeneity among types of firms choosing shelf registration, not the shelf-

registration itself, leads to the finding of lower underwriter fees.

2.1.7 Discounting/Underpricing

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Kim, Palia, and Saunders (2010) argue that the indirect costs of undertaking firm-

commitment SEOs (a.k.a. discounting or underpricing) might be jointly determined with

investment bank fees.11

They show a positive and significant relation between gross spreads and

indirect costs for industrial SEOs, in line with the costs being complementary. More recently,

extending the REIT IPO underpricing models to SEOs (e.g. Chang, Wang and Yang (2009)),

Goodwin (2011) examines the indirect costs of REIT SEOs for a sample of issuers between

1994 and 2006 and finds that SEO discounting (underpricing) costs the typical REIT almost

$1.7M ($1.2M). To account for the potential correlation between indirect and direct costs of

SEOs, discounting is controlled for in the multivariate models.

2.2 Multivariate Model

This study follows recent SEO research by Lee and Masulis (2009) and Kim, Palia, and

Saunders (2010) and measures the total direct costs of SEOs as the dollar fees paid to investment

banks divided by total proceeds (GrossSpread). The dollar fee is the difference between the price

at which the underwriting syndicate buys shares from issuers and the share offer price. Hence,

GrossSpread is the dependent variable for baseline specifications. In subsequent models, the

dependent variable is respecified to analyze individual components of direct costs.

Equation (1) specifies the baseline model:

(1). Pr

)Pr(

)Pr()()Pr(

1990Pr Pr

)(

,

2007

1991

6

1

,18,17,16,15

,14,13,12,11

10,9,87,6

5432,10,

tij jj j

titititi

titititi

ititiiti

i,ti,ti,tLowMktCaptiti

YearDummymiesopFocusDum

oceedsREITLnDiscountShelfMultiBook

RankiceShareLnTurnoverLnoceedsTotLn

PostcyTransparenevSEOsUPREITiorLend

l)Ln(StockVoLOCRated DMktCapLndGrossSprea

12

The following variables control for various components of information asymmetry: Ln(MktCap)

is the natural logarithm of the market capitalization of the issuer, using the share price one day

prior to the date of issuance. DLowMktCap is a binary variable equal to 1 if the firm is in the lowest

decile of market capitalization and 0 otherwise. This variable accounts for the presence of micro-

REITs, which is important since some sample firm-years have market capitalizations of less than

$100M. The variable Rated (LOC) is a dummy variable set equal to 1 if the firm has a long-term

S&P debt rating (access to credit lines), 0 otherwise. Ln(StockVol) is the volatility of daily

returns over the 6 months prior to the offering date. PriorLend is an indicator variable that equals

1 if the underwriter has served as the underwriter on a prior equity offering for the issuer, 0

otherwise. UPREIT is a dummy variable set equal to 1 if the REIT is an operating partnership, 0

otherwise. The number of times the firm accessed the SEO market during the previous year is

accounted for with the variable PrevSEOs. Transparency is 1 minus the proportion of explained

variation in the expanded market model regressions calculated over the pre-issue year. Post1990

is a binary variable equal to 1 if the IPO was issued after 1990, 0 otherwise.

The variable Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds, which

provides a test for economies of scale in REIT SEOs. The natural logarithm of average monthly

stock volume divided by number of shares outstanding over the 12 months prior to offering

(Ln(Turnover)) and the natural logarithm of share price on the day prior to the issue

(Ln(SharePrice)) serve as proxies for liquidity and institutional demand for the REIT’s stock,

respectively. Rank measures underwriter reputation and is based on the Carter and Manaster

reputation measure (obtained from the website of Jay Ritter). MultiBook is a binary variable

equal to 1 if there are multiple bookrunners, 0 otherwise. Shelf is also binary, equal to 1 if the

issue is registered under Rule 415, 0 otherwise. Discount is the offer price discount defined as

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the closing price on the day prior to the SEO minus the offer price scaled by closing price on the

day prior to the SEO (Huang and Zhang, 2011).12,13

Ln(REITProceeds) accounts for the equity

issuance activity in the overall REIT market and is defined as the natural logarithm of total SEO

proceeds raised by REITs over the 3 months prior to the issue.

Property focus and time effects warrant additional controls. The former is important since

the riskiness of cash flows might also be linked to adverse selection; hence, investment banks

may price this risk into the direct costs of SEOs. Property type is defined by the seven property

classifications of the property focus variable provided by SNL: Hotel, Industrial, Office, Other

(Diversified, Manufactured Homes, or Other), Residential, Retail (Mall, Retail, or Shopping),

and Self-storage. Other is the base property type for this study. Annual dummies account for

macroeconomic effects that affect all firms in a given year.

While the gross spread is the total compensation paid to the group of underwriters, it is

often comprised of three separate components: management fees, underwriting fees, and selling

concessions. Each cost component accrues from different services provided and risks undertaken

by the respective group (managing, underwriting, and selling) in the syndicate.14

Because of

these different sources of risk, the direct costs are decomposed into the three components and

Equation (1) is re-estimated using alternative dependent variable specifications. Therefore, while

total direct costs of equity issuance establish the baseline results, the decomposition sheds more

light on the underwriting fee setting strategy for REITs.

III. Data and Summary Statistics

The sample of equity REITs is identified by using monthly trade publications produced

by the National Association of Real Estate Investment Trusts (NAREIT).15

The Center for

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Research on Security Prices (CRSP) is the source of stock prices, returns, volume, and number of

shares outstanding. Securities Data Corporation (SDC) New Issues Database provides necessary

data on REIT SEOs, including issue dates, total proceeds, underwriters, and shelf registration.

Underwriter reputation is taken from Jay Ritter's website. SNL REIT Datasource provides

property focus, operating structure, access to credit lines, and S&P credit ratings.

Following previous empirical studies on gross spreads (Butler, Grullon, and Weston

(2005), Lee and Masulis (2009), and Kim, Palia, and Saunders (2010)), the present sample

covers REIT issuers using a firm commitment contract.16

Under this flotation method,

underwriters buy shares from issuers at a discount from the offer price. This discount represents

investment banks fees, compensating underwriters for their services.

Our final sample is an unbalanced panel of 460 firm-commitment equity offerings made

by 144 unique equity REITs over the 1990-2007 period. The maximum, minimum, and mean

number of individual firm appearances are12, 1, and 1.49, respectively.

Table 1 presents the sample descriptive statistics. The distribution of direct costs as a

proportion of issue proceeds (GrossSpread) is relatively symmetric across the sample of REITs

with mean and median of 4.65% and 5.23%, respectively. These measures of location indicate

negative skew in GrossSpread; that is, certain sample firms have relatively low investment

banking fees. One particular REIT paid roughly 7.14% (maximum) of issue proceeds in the form

of direct costs, or roughly $4.1M in investment banking fees. Regarding control variables, only

28% percent of the sample has an S&P long-term debt rating, while about 75% of the sample has

access to private bank debt. The average REIT SEO generates $88.68M in issuance proceeds.

The mean underwriter rank is 8.43. These values are similar to those reported in previous REIT

SEO studies (Goodwin (2011)) and slightly higher than for industrial SEOs (Lee and Masulis

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(2009)). During the three months prior to SEO, the REIT industry collectively issued over

$2.23B in seasoned equity offerings (REITProceeds).

Panels A, B, and C of Table 2 show the distribution of the sample across time, property

focus, and operating structure, respectively. The time-series variation in SEOs indicates some

clustering with spikes in issuance during 1997-1998. Comparing GrossSpread at the endpoints of

the sample period, the direct costs of REIT SEOs declined from 5.99% to roughly 2.39%, while

issuance proceeds increased substantially.

Findings in panel B are consistent with the number of REITs within the property types, as

REITs classified as Retail and Office (Storage) use SEOs most (least) frequently. Casual

comparison of mean GrossSpread shows some variation across property focus.

Panel C of Table 2 shows 80.21% of the sample firms as operating partnerships

(UPREIT).17

GrossSpread is roughly 0.27% lower for UPREITs relative tothe sub-sample of

non-UPREITs. The null hypothesis of mean equality in GrossSpread across groups is rejected

only at the 10% level. This univariate finding is inconsistent with higher costs of equity for

REITs with greater information asymmetries.

Table 3 provides Pearson correlation coefficients for the variables included in Equation

(1). GrossSpread and its cost components are significantly associated with many of the

traditional determinants of SEO direct costs and many of the correlations support the initial

expectations. Further inferences accompany the presentation of multivariate results. Although

untabulated, high correlations among some control variables motivates presentation of a reduced-

form models to mitigate collinearity concerns.

IV. Multivariate Results

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4.1 Baseline Results

Table 4 presents pooled OLS regression results for the determinants of REIT investment

banking fees. Each model includes untabulated fixed time effects. Following Petersen (2009),

standard errors are heteroskedasticity-consistent and cluster at the firm level. Column 1 presents

results after estimating Equation (1), while the remaining columns provide findings for

alternative specifications.

Results in column 1 are generally inconsistent with information asymmetry influencing

the direct costs of REIT SEOs. In fact, the sole statistically significant proxy for information

asymmetry is DLowMktCap. A significant increase in direct costs for micro-REITs, matches

expectations and implies that investment bankers require additional compensation for bearing the

increased risk of placing new equity for extremely small REITs. In terms of economic

significance, the coefficient estimate for DLowMktCap suggests a 0.45% increase in GrossSpread

for REITs in the lowest decile of market capitalization. This coefficient estimate implies a

$0.401M increase in gross spreads for these issuers.

Overall, results from the initial model estimation provides scant evidence of information

asymmetries influencing the direct costs of REIT SEOs, in contrast with Goodwin’s (2011)

finding of a weak positive relation between indirect costs of REIT SEOs and information

asymmetry. This also differs dramatically from results presented in the non-REIT SEO literature

and may be due to the transparency of REITs. Differences in direct costs across REITs and non-

REITs are further examined below.

Results in column 1 of Table 4 show a positive and significant (1% level) relation

between the direct costs of equity issuance and total issue proceeds. That is, the observed relation

between GrossSpread and Ln(TotProceeds) indicates that per unit costs of share issuance

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increase with issue proceeds. This finding indicates a diseconomy of scale in direct costs of

REIT SEOs in contrast with the non-REIT SEO literature where economies of scale appear in

share issuance costs (Butler, Grullon, and Weston (2005) and Lee and Masulis (2009)). The

direct relation between direct costs and SEO issuance proceeds aligns with Altinkilic and

Hansen’s (2000) theory that issuers focus on financing needs, not cost minimization which is

plausible for REITs given the unique operating restrictions that induce financial constraint.

The trading characteristics of the issuer's stock exert significant influence on direct costs,

as both turnover and share price are negative and statistically significant. These coefficients are

consistent with the view that weaker trading frictions result in lower underwriters’ intermediation

costs and provides increased demand by institutional investors, resulting in lower investment

banking fees (Butler, Grullon, and Weston (2005)).

GrossSpread is directly and significantly associated with underwriter reputation, which

implies that more reputable banks charge higher fees. This is consistent with investment banks

earning reputational rents from SEO underwriting (Fernando, Gatchev, May, and Megginson

(2012)). In contrast to the non-REIT SEO literature, REITs employing an underwriter syndicate

(MultiBook) pay significantly higher banking fees. Specifically, REIT issuers employing an

underwriting syndicate pay $0.518M more, on average. Apparently, the coordination and risk

sharing among members of underwriting syndicates does not result in lower fees. This may be

due to reputational rents exceeding the efficiencies resulting from the coordination and risk

sharing in an underwriting syndicate for REIT SEOs. The variable Shelf is insignificantly

different from zero, suggesting that REIT investment banking fees are invariant to offer method.

GrossSpread and Discount are insignificantly related, suggesting that the direct and

indirect costs of REIT seasoned offerings are not complementary. Despite its statistical

18

insignificance, controlling for Discount is an important aspect of our study as it allows us to

make stronger inferences with respect to the other factors that influence SEO direct costs for

REITs.

Interestingly, investment banking fees are inversely related to recent REIT SEO activity

in the primary market. In contrast to the crowding out effect shown for industrial SEOs

(Altinkilic and Hansen (2000)), the present results indicate that increased financing activity

lowers the direct cost for REITs issuing securities (Bayless and Chaplinsky (1996)).18

This

implies that adverse selection in the overall REIT market, not the firm level, affects the cost of

raising equity capital. This finding aligns with the Goodwin (2011) results showing significantly

reduced discounting for REIT SEOs during periods of high financing activity.

Coefficient estimates for the property dummies represent differences in the cost of equity

capital relative to REITs classified as Other, the base property type. All else constant, results

exhibit no significant variation in GrossSpread across property focus. To conserve space results

for the time dummies are omitted; however, the coefficient estimates are significantly negative

during the 2003-2007 period, reaching a minimum in 2006 and 2007. Similar to the univariate

and time-series variations in GrossSpread, these findings are consistent with increased

transparency and liquidity over the sample period for the overall REIT equity market.

4.2 Decomposition of GrossSpread

In columns 2-4 and again in columns 6-8, the dependent variable in Equation (1) is

respecified to represent the individual components of GrossSpread. Individual costs consist of

management fees, underwriting fees, and selling concessions across columns 2-4, respectively.19

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This decomposition allows refinement of the analysis and more precision in determining the cost

components that can be managed by altering REIT financial or operating characteristics.

The significant determinants of GrossSpread generally hold across the individual

components. Specifically, DLowMktCap, Ln(TotProceeds), Ln(Turnover), and Ln(SharePrice) retain

their statistical significance and are signed similarly to the column 1 values. An interesting

difference emerges with respect to UPREIT: where results show lower management fees for

REITs using the operating partnership structure. This finding is opposite our expectation given

that increased informational frictions accompany the partnership structure (Han (2006)). Further,

the inverse relation between management fees and UPREIT also contrasts with Goodwin’s

(2011) finding of significantly greater discounting (indirect costs) for REITs using the

partnership structure.

Another result different from expectations is that only the underwriting fee portion of

gross spread is significantly related to underwriter reputation (Rank), consistent with investment

banks earning reputational rents from making underwriting commitments for REIT SEOs.

Finally, the use of underwriting syndicates (MultiBook) results in higher underwriting fees and

selling concessions. This finding does not support the idea of risk sharing between underwriters

leading to lower cost of seasoned equity for REITs.

4.3 Robustness Tests

The remaining results in Table 4 indicate the robustness of the initial findings to

collinearity concerns that may produce the unexpected outcomes in the preceding section. To

determine whether the correlation among the independent variables unduly influences

significance levels, a general-to-simple modeling strategy estimates parsimonious versions of

20

Equation (1), as displayed across columns 5 and 8.20

The parsimonious model does not include

Ln(MktCap) or DLowMktCap because of their close relationhips with the other controls. Post1990 is

excluded due to its correlation with UPREIT. Ln(StockVol), Shelf, and Rated are also dropped

from the baseline model because of their high correlations with Ln(SharePrice). As a result, the

parsimonious model includes information asymmetry proxies specific to the REIT industry

(UPREIT, Transparency, and PrevSEOs), access to private bank debt (LOC), and PriorLend.

Reduced-form results are qualitatively similar, to the initial findings, as the cost of equity

remains unrelated to firm-level informational asymmetries, negatively related to market level

activity, and directly related to underwriter reputation as well as use of underwriting syndicates.

Another concern is whether the initial results are robust to unobserved REIT-specific

heterogeneity. To mitigate this concern Equation (1) is re-estimated using random effects (Table

5). Tests for fixed effects (Hausman (1978)) support the null hypothesis of no fixed firm effects

(χ = 18.32 and p-value = 0.975), hence random effects are preferred.

The findings from the random effects models are in line with the pooled OLS analysis.

GrossSpread does not vary with firm-level information asymmetry; however, it is inversely

related to the adverse selection costs in the overall REIT market. Investment bank fees are also

positively related to underwriters’ reputation and utilization of multiple lead investments during

the REIT SEO underwriting process.The relation between management fees and UPREIT is

much weaker using the random effects methodology, suggesting that the positive effect of

UPREIT is driven largely by unobserved firm effects correlated with the partnership structure.

4.4 Differences in Direct Costs of Equity for REITs and non-REITs

21

This analysis concludes by testing for differences in investment banking fees across REIT

and industrial issuers of seasoned equity. This is an important issue because of structural

differences between REITs and non-REITs that may imply differences intransparency between

REITs and non-REITs. Dolvin and Pyles (2009) find smaller price revisions for REIT IPOs,

relative to a matched sample of industrial firms, and attribute this to reduced adverse selection

costs. It follows that investment banking fees may systematically vary between REIT and non-

REIT industries.21

To test this conjecture, each sample REIT is matched to an industrial firm undertaking a

firm commitment seasoned equity offering. The matching procedure requires a non-REIT SEO

within 30 days of the REIT SEO, and the issue size proceeds must range between 80-120% of

the REIT’s total gross proceeds. The issue with total proceeds closest to that of the REIT is used

when multiple non-REITs meet the matching criteria.

Table 6 provides univariate results for the difference in direct costs of equity across the

sub-samples. Average GrossSpreads are 4.65% and 5.22% for REITs and non-REITs,

respectively. The cost differential (0.571%) is significant at the 1% level, providing initial

evidence that REITs pay less for SEOs.

Table 7 presents multivariate test results for differences in SEO direct costs across REITs

and matched non-REITs where Equation (1) is augmented by including the binary variable REIT,

which equals 1 if the firm-year observation is a REIT, 0 otherwise. Another change in the model

is that line of credit data is omitted from this component of the analysis, being unavailable for

industrial firms. Further, this variant of Equation (1) includes neither property focus dummies

nor UPREIT, as the focus is on differences in investment banking fees across REITs and non-

REITs. Since the pooled model includes REIT and traditional issues, Ln(MarketProceeds) is

22

defined as the equity issuance activity for both REITs and industrial firms over the 3 months

prior to the issue.22

Similarly, Transparency for industrial firms is computed as 1 minus the

explained proportion of the sum of squared errors from market model regressions over the pre-

issue year.23

Consistent with univariate evidence, the multivariate results suggest that REITs have

significantly lower investment banking fees than industrial issuers after controlling for the

traditional determinants of SEO direct costs. The coefficient estimate for REIT indicates that

GrossSpread is 1.12% lower for REITs relative to comparable non-REITs. Results in columns 2-

4 suggest that the REIT discount extends to each component of the associated investment

banking fees. The REIT effect also appears in the reduced-form model results (columns 5-8).

Models presented in Table 8 address random effects, again for a matched sample. These findings

indicate that even after accounting for unobserved firm-specific heterogeneity, REIT is

statistically significant at the 1% level.

The significantly lower direct costs of SEOs for REITs may be attributable to reduced

price uncertainty resulting from operating restrictions that reduce growth opportunities and free

cash flow problems. Importantly, this finding is consistent with the lower costs of IPOs for

REITs, as reported by Dolvin and Pyles (2009). The lower direct costs of SEOs and costs of IPO

further support the view that investors face less adverse selection problems with REITs than with

non-REITs.

To determine whether these findings are sensitive to the matching procedure, the model is

re-estimated using an alternative matching methodology. A particular concern is that REITs may

receive a bulk rate discount for using equity markets so frequently. Accordingly, the matching

procedure is extended to include an SEO frequency dimension.24

Specifically, each sample REIT

23

is re-matched to an industrial firm by requiring non-REIT issuers to have the same number of

SEOs in the year prior to the issue. As before, the non-REIT SEO must range between 80-120%

of the REIT’s total gross proceeds and occur within 30 days of the REIT SEO. The non-REIT

SEO with the closest total proceeds is chosen in case multiple non-REITs meet the matching

above criteria.

After re-estimating results using the sample generated by this alternative matching

methodology, the findings from the alternative matching (not tabulated here) still suggest

significantly lower gross spreads for REIT SEOs. Specifically, the coefficient estimate for REIT

implies that REIT investment bank fees are 1.23% cheaper for REIT SEOs, relative to

comparable non-REIT SEO direct costs. The significance of REIT is robust across each direct

cost component.

V. Conclusion

This study provides the first examination of the magnitude and determinants of the direct

costs of raising external capital via REIT SEOs. In addition to extending the growing body of

literature examining issues related to SEOs, this study has implications for practitioners. REIT

managers can use these results to seek ways to reduce their firms’ cost of equity capital. This is a

non-trivial implication given that the univariate results indicate that REIT gross spreads are

typically 4.65%.

In terms of multivariate results the direct cost of REIT SEOs, unlike industrial SEOs, is

almost exclusively unrelated to firm-level information asymmetry. However, increased trading

liquidity and high share prices lower investment bank fees, consistent with these characteristics

mitigating investment banks’ costs of placing newly issued equity. Furthermore, gross spreads

24

are positively related to the level of proceeds, unlike the economies of scale for industrial firms.

This finding supports the idea that REITs focus on the level of equity proceeds, not on

minimizing investment banking fees. Further, REITs employing underwriting syndicates and

investment banks with better reputations pay higher fees. Findings show scant variation in gross

spreads across property focus or operating structure. These inferences generally hold after

specifying the individual components of gross spreads as the dependent variable.

Importantly, the direct costs of REIT SEOs are significantly lower relative to a matched

sample of non-REITs. This finding parallels evidence from REIT IPOs and provides additional

support for REITs being more transparent relative to industrial firms.

This study provides several avenues for future research. For example, further analysis in

the REIT SEO area is needed to determine whether issuers receive a discount from using the

same underwriter for multiple SEOs. Along the same lines, does a switch in underwriter generate

differences in costs? An interesting question for future research involves whether issuers using

SEOs extensively pay lower fees than firms that are less active issuers of equity.

25

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30

Table 1. Descriptive Statistics

Variables N Mean Standard

Deviation Minimum Median Maximum

GrossSpread (%) 460 4.647 1.417 0.109 5.231 7.141

ManagementFee(%) 460 0.911 0.307 0.0217 2.904 0.993

UnderwritingFee(%) 460 0.944 0.310 0.0217 1.621 1.015

SellingConcession (%) 460 2.569 0.797 0.065 4.284 2.778

MktCap($M) 460 812.001 840.853 10.904 537.834 5211.360

DLowMktCap 460 0.100 0.300 0.000 0.000 1.000

Rated 460 0.280 0.449 0.000 0.000 1.000

LOC 460 0.752 0.432 0.000 1.000 1.000

StockVol 460 0.013 0.004 0.007 0.012 0.048

PriorLend 460 0.410 0.492 0.000 0.000 1.000

UPREIT 460 0.802 0.398 0.000 1.000 1.000

PrevSEOs 460 0.665 0.863 0.000 0.000 6.000

Transparency 460 0.478 0.238 0.010 0.445 0.995

Post1990 460 0.780 0.414 0.000 1.000 1.000

TotProceeds($M) 460 88.682 88.604 7.601 58.400 661.905

Turnover (%) 460 0.330 0.201 0.026 0.299 1.869

SharePrice ($) 460 26.015 11.397 5.700 25.250 126.590

Rank 460 8.435 0.901 4.750 9.000 9.000

MultiBook 460 0.097 0.297 0.000 0.000 1.000

31

Shelf 460 0.736 0.440 0.000 1.000 1.000

Discount 460 0.015 0.093 -1.808 0.009 0.501

REITProceeds ($M) 460 2,237.080 1,498.480 0.000 2,127.180 4,902.740

This table presents sample characteristics of the 460 firm-commitment REIT SEOs conducted by 144 unique REITs over the 1990-2007 period.

GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price

and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds.

UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. MktCap is market

capitalization, calculated as the number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator

variable set equal to 1 if the firm is in the lowest decile of market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0

otherwise. LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0 otherwise. StockVol is the standard deviation of daily stock

returnsover the 12 months prior to the SEO issue date. PriorLend equals 1 if the underwriter has previously underwritten equity offerings for the

issuer, 0 otherwise. UPREIT equals 1 if the firm uses anoperating partnership structure, 0 otherwise. PrevSEOs is the number of SEOs in the previous

year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable that

takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. TotProceedsis SEO issuance proceeds. Turnover is average monthly stock volume

divided by number of shares outstanding over 12 months prior to the SEO issue date. SharePrice is the firm's stock price on the day prior to SEO

issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable equal to 1

if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise.

Discount is the offer price discount, defined as SharePrice minus the offer price divided by SharePrice. REITProceeds is the total SEO proceeds

raised by all REITs over the 3 months prior to the SEO.

32

Table 2.Time and Property Focus Distribution of Sample of REITs

Year N GrossSpread(

%)

Management

Fee(%)

Underwriting

Fee(%)

Selling

Concession(%)

Average

TotProceeds ($M)

1990 2 5.994 1.236 1.169 3.588 97.216

1991 6 5.634 1.112 1.202 3.214 57.363

1992 9 5.450 1.029 1.049 2.990 70.836

1993 15 5.345 1.016 1.085 2.873 115.006

1994 23 5.342 1.047 1.155 2.972 117.789

1995 41 5.390 1.010 1.083 2.874 107.607

1996 52 5.002 0.967 1.004 2.674 118.835

1997 100 4.876 0.940 0.977 2.673 134.198

1998 116 3.854 0.773 0.800 2.229 62.204

1999 4 5.267 1.106 1.155 2.614 152.819

2000 5 4.372 0.849 0.849 2.547 177.113

2001 22 5.200 1.083 1.041 2.798 85.024

2002 13 4.997 0.960 0.979 2.834 104.222

2003 5 4.294 0.783 0.837 2.389 71.304

2004 14 3.875 0.754 0.733 2.229 117.593

2005 17 4.305 0.896 0.863 2.320 144.803

2006 14 3.432 0.730 0.725 1.920 192.767

2007 2 2.389 0.478 0.780 1.432 148.367

460 REIT SEOs

(144 Unique REITs) 4.647

106.564

33

Panel B: Property Focus Distribution of Sample

Property

Focus N

GrossSpread

(%)

Management

Fee(%)

Underwriting

Fee(%)

Selling

Concession(%)

Average

TotProceeds($M)

Hotel 52 4.553 0.911 0.906 2.456 128.336

Industrial 26 4.395 0.842 0.907 2.382 78.646

Office 106 4.471 0.863 0.901 2.247 145.585

Other 61 4.797 0.941 0.966 2.696 103.721

Retail 111 4.713 0.926 0.952 2.619 79.762

Residential 83 4.847 0.959 1.01 2.680 91.081

Storage 21 4.510 0.881 0.906 2.496 101.374

Total 460 REIT SEOs

Panel C: UPREIT Distribution

In an UPREIT? N Gross Spread

(%)

Management

Fee(%)

Underwriting

Fee(%)

Selling

Concession(%)

Average

TotProceeds

($M)

Yes

369

4.593

0.893

0.930

2.536

110.554

No 91 4.866 0.983 1.003 2.703 90.383

Difference in

Means (T-

statistics)

1.88*

2.38**

2.20**

1.96*

Panels A, B, and C of this table present the distribution of the sample across time, property focus, and operating structure, respectively. The sample consists of 460 firm-commitment REIT SEOs

conducted by 144 unique publicly traded equity REITs over the 1990 to 2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the

difference between the offer price and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is

34

underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. TotProceeds is SEO issuance proceeds (inflation-adjusted and in millions). The 7

categories of property focus (taken from SNL) are Hotel, Industrial, Retail (Retail, Regional Mall, Shopping Center), Residential, Office, Storage, and Other (Diversified, Health Care, Manufactured

Homes, and Other). T-statistics are calculated assuming unequal variances. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

35

Table 3.Pearson Correlation Coefficients

Variable GrossSpread ManagementFee UnderwritingFee SellingConcession Ln(MktCap) -0.343*** -0.257*** -0.299*** -0.282*** DLowMktCap 0.243*** 0.208*** 0.217*** 0.223*** Rated -0.160*** -0.072 -0.110** -0.123*** LOC -0.065 -0.073 -0.042 -0.067 Ln(StockVol) 0.136*** 0.083* 0.098** 0.110** PriorLend -0.006 0.011 0.006 -0.016 UPREIT -0.076* -0.116** -0.093** -0.083* PrevSEOs -0.194*** -0.167*** -0.163*** -0.158*** Transparency 0.110** 0.078* 0.102** 0.063 Post1990 -0.095** -0.097** -0.096** -0.095** Ln(TotProceeds) 0.204*** 0.137*** 0.152*** 0.114** Ln(Turnover) -0.262*** -0.252*** -0.268*** -0.257*** Ln(SharePrice) -0.315*** -0.258*** -0.264*** -0.274*** Rank 0.140*** 0.116** 0.138*** 0.099** MultiBook -0.025 -0.018 -0.031 -0.041 Shelf -0.263*** -0.204*** -0.236*** -0.238*** Discount -0.122*** -0.096** -0.099** -0.096** Ln(REITProceeds) -0.298*** -0.242*** -0.287*** -0.228***

This table shows Pearson correlation coefficients for many of the variables used in the analysis. The sample consists of 460 firm-commitment REIT SEOs conducted by 144

unique REITs over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the

offer price and the price at which the underwriting syndicate buys shares from the issuer. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number of

shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable that is set equal to 1 if the firm is in the lowest decile of market

capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. LOC is a binary variable that is set equal to 1 if the issuer has a line of credit, 0

otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the

underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. UPREIT equals 1 if the firm uses an operating partnership structure, 0 otherwise. PrevSEOs is

the number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Post1990 is a binary variable

that takes the value of 1 if the REIT went IPO after 1990, 0 otherwise. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of

the average monthly stock volume divided by number of shares outstanding over 12 months prior to the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock

price on the day prior to SEO issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that

equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer

price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3

months prior to the SEO. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

36

Table 4. Pooled OLS Results

Independent Variables

Gross Spread Management

Fee Underwriting

Fee Selling

Concession Gross

Spread Management

Fee Underwriting

Fee Selling

Concession

Ln(MktCap) -0.185 -0.027 -0.044 -0.054

(-1.59) (-1.02) (-1.59) (-0.79)

DLowMktCap 0.453** 0.108** 0.097* 0.304

(2.31) (2.17) (1.92) (2.62) Rated 0.218 0.067 0.068* 0.088

(1.21) (1.81) (1.72) (0.87) LOC -0.062 -0.009 -0.004 -0.051 -0.048 -0.008 -0.001 -0.046 (-0.48) (-0.39) (-0.14) (-0.69) (-0.36) (-0.31) (-0.02) (-0.60)

Ln(StockVol) 0.038 -0.053 -0.022 0.001

(0.17) (-1.05) (-0.42) (0.01) PriorLend 0.090 0.034 0.036 0.047 0.050 0.030 0.030 0.024 (0.69) (1.13) (1.18) (0.59) (0.39) (0.99) (0.99) (0.31)

UPREIT -0.178 -0.063** -0.042 -0.108 -0.202 -0.070** -0.049* -0.119 (-1.31) (-2.25) (-1.40) (-1.23) (-1.46) (-2.51) (-1.65) (-1.33)

PrevSEOs -0.019 -0.014 -0.003 0.001 -0.070 -0.020 -0.013 -0.020 (-0.21) (-0.70) (-0.17) (0.03) (-0.84) (-1.08) (-0.71) (0.69)

Transparency -0.327 -0.084 -0.050 -0.279* -0.078 -0.047 -0.001 -0.163 (-1.30) (-1.46) (-0.84) (-1.73) (-0.32) (-0.84) (-0.01) (-1.06)

Post1990 0.249 0.028 0.043 0.157

(1.46) (0.82) (1.27) (1.51) Ln(TotProceeds) 0.334*** 0.047*** 0.053*** 0.114** 0.307*** 0.038** 0.044** 0.105** (4.11) (2.79) (2.82) (2.31) (3.88) (2.33) (2.43) (2.21)

Ln(Turnover) -0.261** -0.070** -0.083** -0.166** -0.203* -0.067*** -0.073** -0.143* (-2.30) (-2.78) (-3.11) (-2.42) (-1.84) (-2.67) (-2.89) (-2.18)

Ln(SharePrice) -0.718*** -0.138*** -0.145*** -0.398*** -1.009*** -0.168*** -0.199*** -0.515*** (-4.18) (-3.75) (-3.52) (-3.75) (-6.21) (-4.85) (-5.35) (-5.10)

Rank 0.143** 0.029 0.031* 0.065 0.116 0.026 0.026* 0.049 (2.03) (1.58) (1.96) (1.63) (1.62) (1.42) (1.68) (1.20)

MultiBook 0.583** 0.082 0.131** 0.301** 0.484* 0.065 0.111* 0.247 (2.28) (1.31) (2.26) (2.02) (1.76) (1.00) (1.83) (1.57)

Shelf -0.157 -0.023 -0.016 -0.106

(-1.12) (-0.72) (-0.49) (-1.21)

37

Discount -0.131 -0.021 0.022 -0.063 -0.304 -0.072 -0.027 -0.134 (-0.27) (-0.17) (0.17) (-0.23) (-0.66) (-0.61) (-0.22) (-0.51) Ln(REITProceeds) -0.228*** -0.035* -0.059*** -0.067 -0.252*** -0.038** -0.063*** -0.080* (-3.05) (-1.96) (-2.94) (-1.58) (-3.49) (-2.19) (-3.20) (-1.97)

Hotel -0.355 0.006 -0.065 -0.279 -0.234 0.019 -0.046 -0.201 (-1.55) (0.12) (-1.41) (-1.74) (-1.08) (0.35) (-1.04) (-1.32)

Industrial -0.324 -0.066 -0.041 -0.257 -0.201 -0.041 -0.013 -0.193 (-1.12) (-1.08) (-0.72) (-1.51) (-0.72) (-0.71) (-0.24) (-1.16)

Office -0.014 0.021 0.013 -0.056 0.027 0.027 0.019 -0.019 (-0.07) (0.46) (0.32) (-0.39) (0.13) (0.57) (0.45) (-0.14)

Residential 0.182 0.068 0.070 0.050 0.249 0.087* 0.088** 0.091 (0.93) (1.52) (1.59) (0.39) (1.37) (1.94) (2.33) (0.77)

Retail -0.033 0.005 -0.020 -0.053 -0.005 0.018 -0.010 -0.037 (-0.17) (0.14) (-0.52) (-0.43) (-0.03) (0.44) (-0.26) (-0.32)

Storage -0.287 -0.061 -0.055 -0.222 -0.268 -0.048 -0.046 -0.207 (-0.97) (-0.91) (-0.86) (-1.22) (-0.80) (-0.68) (-0.64) (-1.06)

R-Sq 0.358 0.254 0.309 0.261 0.333 0.232 0.285 0.237 N 454 454 454 454 454 454 454 454

This table presents pooled OLS regressions predicting REIT investment banking fees. The sample consists of 460 firm-commitment REIT SEOs conducted by 144 unique REITs

over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price

and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting

fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the

number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of

market capitalization, 0 otherwise.Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise.LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0






price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that equals

1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer price

discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3

months prior to the SEO. Hotel, Industrial, Office, Residential, Retail, and Storage are dummy variables representing property focus classifications. Other is the reference case.

Unreported standard errors are heteroskedasticity consistent and cluster by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity

intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

38

Table 5.Random Effects Model



Fee Underwriting

Fee Selling

Concession Gross Spread Management

Fee Underwriting

Fee Selling

Concession

Ln(MktCap) -0.185 -0.027 -0.044 -0.054

(-1.49) (-0.95) (-1.57) (-0.73) DLowMktCap 0.453* 0.108* 0.097* 0.304*

(1.65) (1.70) (1.56) (1.84) Rated 0.218 0.067 0.068* 0.088

(1.28) (1.70) (1.76) (0.86) LOC -0.062 -0.009 -0.004 -0.051 -0.048 -0.008 -0.001 -0.046 (-0.43) (-0.28) (-0.12) (-0.59) (-0.33) (-0.23) (-0.02) (-0.53)

Ln(StockVol) 0.038 -0.053 -0.022 0.001

(0.13) (-0.80) (-0.34) (0.01) PriorLend 0.090 0.034 0.036 0.047 0.050 0.030 0.030 0.024 (0.68) (1.09) (1.19) (0.59) (0.38) (0.97) (1.01) (0.30)

UPREIT -0.178 -0.063* -0.042 -0.108 -0.202 -0.070* -0.049* -0.119 (-1.10) (-1.66) (-1.13) (-1.11) (-1.24) (-1.85) (-1.32) (-1.22)

PrevSEOs -0.019 -0.014 -0.003 0.001 -0.070 -0.020 -0.013 -0.020 (-0.24) (-0.77) (-0.19) (0.03) (-0.88) (-1.11) (-0.72) (0.42)

Transparency -0.327 -0.084 -0.050 -0.279* -0.078 -0.047 -0.001 -0.163 (-1.17) (-1.29) (-0.79) (-1.66) (-0.29) (-0.76) (-0.01) (-1.02)

Post1990 0.249 0.028 0.043 0.157

(1.50) (0.73) (1.14) (1.58) Ln(TotProceeds) 0.334*** 0.047*** 0.053*** 0.114** 0.307*** 0.038* 0.044** 0.105** (3.76) (2.26) (2.64) (2.14) (3.51) (1.89) (2.24) (2.01)

Ln(Turnover) -0.261** -0.070** -0.083** -0.166** -0.203 -0.067** -0.073*** -0.143* (-2.03) (-2.33) (-2.85) (-2.16) (-1.64) (-2.32) (-2.62) (-1.93)

Ln(SharePrice) -0.718*** -0.138*** -0.145*** -0.398*** -1.009*** -0.168*** -0.199*** -0.515*** (-3.21) (-2.65) (-2.86) (-2.96) (-5.94) (-4.26) (-5.16) (-5.06)

Rank 0.143** 0.029* 0.031** 0.065 0.116* 0.026 0.026* 0.049 (2.06) (1.82) (1.97) (1.55) (1.67) (1.64) (1.70) (1.18)

MultiBook 0.583** 0.082 0.131** 0.301** 0.484* 0.065 0.111* 0.247 (2.20) (1.33) (2.18) (1.89) (1.82) (1.06) (1.84) (1.56)

Shelf -0.157 -0.023 -0.016 -0.106

(-0.84) (-0.53) (-0.39) (-0.94) Discount -0.131 -0.021 0.022 -0.063 -0.304 -0.072 -0.027 -0.134

39

(-0.20) (-0.14) (0.15) (-0.16) (-0.47) (-0.49) (-0.19) (-0.35)

Ln(REITProceeds) -0.228*** -0.035 -0.059*** -0.067 -0.252*** -0.038* -0.063*** -0.080 (-2.31) (-1.56) (-2.65) (-1.13) (-2.57) (-1.70) (-2.85) (-1.37)

Hotel -0.355 0.006 -0.065 -0.279* -0.234 0.019 -0.046 -0.201 (-1.32) (0.11) (-1.07) (-1.72) (-0.90) (0.32) (-0.79) (-1.28)

Industrial -0.324 -0.066 -0.041 -0.257 -0.201 -0.041 -0.013 -0.193 (-1.06) (-0.94) (-0.60) (-1.41) (-0.67) (-0.59) (-0.19) (-1.07)

Office -0.014 0.021 0.013 -0.056 0.027 0.027 0.019 -0.019 (-0.06) (0.40) (0.27) (-0.41) (0.12) (0.52) (0.37) (-0.14)

Residential 0.182 0.068 0.070 0.050 0.249 0.087 0.088* 0.091 (0.75) (1.21) (1.27) (0.34) (1.06) (1.60) (1.65) (0.65)

Retail -0.033 0.005 -0.020 -0.053 -0.005 0.018 -0.010 -0.037 (-0.15) (0.11) (-0.42) (-0.41) (-0.03) (0.36) (-0.21) (-0.29)

Storage -0.287 -0.061 -0.055 -0.222 -0.268 -0.048 -0.046 -0.207 (-0.86) (-0.79) (-0.73) (-1.11) (-0.80) (-0.62) (-0.61) (-1.03)

R-Sq (Overall) 0.358 0.254 0.309 0.261 0.333 0.232 0.285 0.237 R-Sq (Within) 0.313 0.200 0.260 0.202 0.295 0.185 0.240 0.185 R-Sq(Between) 0.396 0.326 0.319 0.351 0.342 0.271 0.303 0.306 N 454 454 454 454 454 454 454 454

This table presents random effects regressions predicting REIT investment banking fees.The sample consists of 460 firm-commitment REIT SEOs conducted by 144 unique REITs

over the 1990-2007 period. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price

and the price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting

fees scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the

number of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of

market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. LOC is a binary variable set equal to 1 if the issuer has a line of credit, 0






price on the day prior to SEO issuance. Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that

equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise. Discount is the offer

price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(REITProceeds) is the natural logarithm of total SEO proceeds raised by all REITs over the 3

months prior to the SEO. Hotel, Industrial, Office, Residential, Retail, and Storage are dummy variables representing property focus classifications. Other is the reference case.

Unreported standard errors are heteroskedasticity consistent and cluster by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity

intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

40

Table 6.Univariate Evidence on Differences in Direct SEO Costs: REITs versus non-REITs

Firm Type N Gross Spread (%) Management

Fee(%)

Underwriting Fee(%) Selling

Concession(%)

Non-REIT 460 5.219 1.076 1.103 3.040

REIT 460 4.647 0.911 0.944 2.569

Difference in

Means (T-

statistics)

6.87***

8.37***

8.42***

10.08***

This table compares the mean gross spreads of REIT SEOs with Industrial SEOs, where industrial SEOs are matched based on issue date and proceeds. GrossSpread is the total

dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price and the price at which the underwriting syndicate buys

shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is

selling concessions divided by total proceeds. T-statistics are calculated assuming unequal variances. *** denotes statistical significance at the 1% level.

41

Table 7 Multivariate Evidence (OLS) on Differences in Direct SEO Costs: REITs versus non-REITs



Fee Underwriting

Fee Selling


Fee Underwriting

Fee Selling

Concession

Ln(MktCap) -0.388*** -0.069*** -0.080*** -0.183***

(-5.24) (-4.24) (-4.60) (-4.27)

DLowMktCap 0.357*** 0.089*** 0.081** 0.196**

(2.45) (2.66) (2.17) (2.38) Rated 0.110 0.048* 0.030 0.057

(0.86) (1.90) (1.09) (0.78) Ln(StockVol) 0.240*** 0.061*** 0.057*** 0.125***

(3.89) (4.46) (3.98) (3.65) PriorLend -0.006 0.005 0.006 -0.013 -0.062 -0.005 -0.005 -0.043 (-0.07) (0.25) (0.30) (-0.23) (-0.64) (0.23) (0.22) (-0.76)

PrevSEOs -0.031 -0.011 -0.005 -0.008 -0.152* -0.032** -0.030** -0.069 (-0.42) (-0.71) (-0.36) (-0.19) (-2.16) (-2.11) (-2.00) (-1.63)

Transparency -0.497** -0.122** -0.094* -0.353** -0.025** -0.044** 0.002 -0.113 (-2.08) (-2.33) (-1.69) (-2.40) (-0.11) (-0.88) (0.05) (-0.79)

Ln(TotProceeds) 0.161** 0.013 0.016 0.037 0.024** -0.013 -0.013 -0.028 (2.55) (0.97) (1.11) (1.02) (0.38) (0.99) (-0.90) (-0.80)

Ln(Turnover) -0.218*** -0.043*** -0.059*** -0.129*** -0.099*** -0.017 -0.032* -0.069 (-3.13) (-3.31) (-3.63) (-3.15) (-1.22) (-1.18) (-1.89) (-1.45)

Ln(SharePrice) -0.299*** -0.074*** -0.046* -0.149** -0.933*** -0.196*** -0.182* -0.463** (-2.97) (-3.40) (-1.85) (-2.55) (-10.89) (-9.97) (-8.79) (-9.45)

Rank 0.060 -0.001 0.005 0.043** -0.001 -0.013 -0.007 0.012 (1.59) (-0.16) (0.55) (2.00) (-0.01) (-1.26) (-0.69) (0.53)

MultiBook 0.201 0.032 0.057 0.071 0.136 0.020 0.043 0.040 (1.08) (0.78) (1.40) (0.66) (0.68) (0.48) (1.01) (0.36)

Shelf 0.036 0.014 0.008 -0.012

(0.33) (0.58) (0.32) (-0.19) Discount 0.217 -0.001 0.017 0.197 0.161 -0.017 0.005 0.168 (0.79) (-0.03) (0.32) (1.14) (0.75) (-0.36) (0.10) (1.22)

Ln(MktProceeds) -0.175*** -0.031** -0.046** -0.045 -0.263*** -0.048** -0.065** -0.091*** (-2.85) (-2.24) (-2.98) (-1.33) (-4.61) (-3.58) (-4.52) (-2.83)

REIT -1.120*** -0.311*** -0.292*** -0.699*** -0.603*** -0.178*** -0.168*** -0.445*** (-4.37) (-5.47) (-4.72) (-4.84) (-3.23) (-4.47) (-3.92) (-4.09)

42

R-Squared 0.366 0.344 0.347 0.339 0.292 0.286 0.283 0.282 N 890 889 890 890 890 889 890 890

This table presents pooled OLS regressions testing for differences in investment banking fees across REIT and non-REIT SEOs. Industrial SEOs are matched based on issue date

and proceeds. Note that the sample is not the same as in Table 1 because matching non-REITs are included here. GrossSpread is the total dollar fees paid to investment banks

divided by total proceeds, where the dollar fee is the difference between the offer price and the price at which the underwriting syndicate buys shares from the issuer.

ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees scaled by total proceeds. SellingConcession is selling concessions divided

by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number of shares multiplied by share price (SharePrice) on the day prior to SEO

issuance. DLowMktCap is an indicator variable set equal to 1 if the firm is in the lowest decile of market capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit

rating, 0 otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns over the 12 months prior to the SEO issue date. PriorLend equals 1 if the

underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. PrevSEOs is the number of SEOs in the previous year. Transparency is 1 minus the proportion

of explained variation from the expanded market model regression. Ln(TotProceeds) is the natural logarithm of SEO issuance proceeds. Ln(Turnover) is the natural logarithm of


price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter and Manaster’s reputation measure. MultiBook is a binary variable that equals

1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if the offer is registered under Rule 415, 0 otherwise.Discount is the offer price

discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(MktProceeds) is the total SEO proceeds raised by all REITs and Industrials over the 3 months

prior to the SEO in question. REIT is an indicator variable that equals 1 if the observation is a REIT, 0 otherwise. Unreported standard errors are heteroskedasticity consistent and

clustered by issuer. T-statistics are in parentheses. All regression models include year dummies. For brevity intercepts are not reported. ***, **, and * denote statistical significance

at the 1%, 5%, and 10% levels, respectively.

43

Table 8.Multivariate Evidence (Random Effects) on Differences in Direct SEO Costs: REITs versus non-REITs



Fee Underwriting

Fee Selling


Fee Underwriting

Fee Selling

Concession

Ln(MktCap) -0.388*** -0.069*** -0.080*** -0.183***

(-6.00) (-4.59) (-5.27) (-4.82) DLowMktCap 0.357*** 0.089*** 0.081*** 0.196**

(2.66) (2.85) (2.57) (2.49) Rate 0.110 0.048* 0.030 0.057

(1.06) (1.99) (1.25) (0.93) Ln(StockVol) 0.240*** 0.061*** 0.057*** 0.125***

(3.76) (4.10) (3.81) (3.33) PriorLend -0.006 0.005 0.006 -0.013 -0.062 -0.005 -0.005 -0.043 (-0.07) (0.27) (0.34) (-0.26) (-0.69) (-0.25) (-0.25) (-0.83)

PrevSEOs -0.031 -0.011 -0.005 -0.008 -0.152** -0.032** -0.030** -0.069* (-0.52) (-0.84) (-0.41) (-0.24) (-2.44) (-2.27) (-2.11) (-1.91)

Transparency -0.497** -0.122* -0.094* -0.353** -0.025 -0.044 0.002 -0.113 (-2.26) (-2.40) (-1.80) (-2.72) (-0.12) (-0.88) (0.05) (-0.88)

Ln(TotProceeds) 0.161*** 0.013 0.016 0.037 0.024 -0.013 -0.013 -0.028 (2.84) (1.00) (1.19) (1.12) (0.43) (-1.04) (-0.98) (-0.88)

Ln(Turnover) -0.218*** -0.043*** -0.059*** -0.129*** -0.099* -0.017 -0.032*** -0.069** (-4.01) (-3.42) (-4.58) (-4.04) (-1.86) (-1.43) (-2.58) (-2.24)

Ln(SharePrice) -0.299*** -0.074*** -0.046* -0.149** -0.933*** -0.196*** -0.182*** -0.463*** (-2.96) (-3.18) (-1.95) (-2.50) (-11.61) (-10.65) (-9.65) (-9.92)

Rank 0.060* -0.001 0.005 0.043** -0.001 -0.013 -0.007 0.012 (1.73) (-0.20) (0.68) (2.11) (-0.01) (-1.63) (-0.87) (0.58)

MultiBook 0.201 0.032 0.057 0.071 0.136 0.020 0.043 0.040 (1.22) (0.85) (1.47) (0.73) (0.79) (0.52) (1.07) (0.40)

Shelf 0.036 0.014 0.008 -0.012

(0.34) (0.57) (0.34) (-0.19) Discount 0.217 -0.001 0.017 0.197 0.161 -0.017 0.005 0.168 (0.77) (-0.02) (0.26) (1.18) (0.55) (-0.26) (0.08) (0.98) Ln(MktProceeds) -0.175*** -0.031** -0.046** -0.045 -0.263*** -0.048** -0.065** -0.091*** (-3.01) (-2.29) (-3.34) (-1.32) (-4.36) (-3.53) (-4.62) (-2.62)

REIT -1.120*** -0.311*** -0.292*** -0.699*** -0.603*** -0.178*** -0.168*** -0.445*** (-4.93) (-5.89) (-5.43) (-5.23) (-3.42) (-4.41) (-4.07) (-4.35)

R-Sq (Overall) 0.366 0.344 0.347 0.339 0.292 0.286 0.283 0.282

44

R-Sq (Within) 0.266 0.138 0.198 0.162 0.203 0.093 0.132 0.107 R-Sq (Between) 0.408 0.440 0.369 0.414 0.267 0.286 0.259 0.304 N 890 889 889 890 890 889 889 890

This table presents random effects regressions testing for differences in investment banking fees across REIT and non-REIT SEOs. Industrial SEOs are matched based on issue

date and proceeds. GrossSpread is the total dollar fees paid to investment banks divided by total proceeds, where the dollar fee is the difference between the offer price and the

price at which the underwriting syndicate buys shares from the issuer. ManagementFee is the ratio of management fees to total proceeds. UnderwritingFee is underwriting fees

scaled by total proceeds. SellingConcession is selling concessions divided by total proceeds. Ln(MktCap) is the natural logarithm of market capitalization, calculated as the number

of shares multiplied by share price (SharePrice) on the day prior to SEO issuance. DLowMktCap is an indicator variable that is set equal to 1 if the firm is in the lowest decile of market

capitalization, 0 otherwise. Rated equals 1 if the issuer has an S&P credit rating, 0 otherwise. Ln(StockVol) is the natural logarithm of the standard deviation of daily stock returns

over the 12 months prior to the SEO issue date. PriorLend equals 1 if the underwriter has previously underwritten equity offerings for the issuer, 0 otherwise. PrevSEOs is the

number of SEOs in the previous year. Transparency is 1 minus the proportion of explained variation from the expanded market model regression. Ln(TotProceeds) is the natural

logarithm of SEO issuance proceeds.Ln(Turnover) is the natural logarithm of the average monthly stock volume divided by number of shares outstanding over 12 months prior to

the SEO issue date. Ln(SharePrice) is the natural logarithm of the firm's stock price on the day prior to SEO issuance.Rank represents underwriter reputation and is based on Carter

and Manaster’s reputation measure. MultiBook is a binary variable that equals 1 if the issue involves multiple bookrunners, 0 otherwise. Shelf is a binary variable set equal to 1 if

the offer is registered under Rule 415, 0 otherwise. Discount is the offer price discount, defined as SharePrice minus the offer price divided by SharePrice. Ln(MktProceeds) is the

total SEO proceeds raised by all REITs and Industrials over the 3 months prior to the SEO in question. REIT is an indicator variable that equals 1 if the observation is a REIT, 0

otherwise. Unreported standard errors are heteroskedasticity consistent and clustered by issuer. T-statistics are in parentheses. All regression models include year dummies. For

brevity intercepts are not reported. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

45

Endnotes

1Prior to 2001, the dividend payout mandate was 95% of taxable income.

2 Despite the large payout requirement, most REITs choose to pay additional discretionary dividends, further reducing their ability to accumulate

capital internally (Wang, Erickson, and Gau (1993)). The minimum dividend is not binding due to depreciation expense, which coupled with capital

gains on property sales, allows REITs to pay dividends in excess of taxable income, as shown by Bradley, Capozza, and Seguin (1998), Ghosh and

Sirmans (2006), Feng, Ghosh, and Sirmans (2007b), and Hardin and Hill (2008). Although, REITs have some discretion when choosing their degree

of financial constraint, the mandatory dividend precludes these firms from pursuing meaningful growth given the capital intensity of the industry.

3Recent research by Riddiough and Wu (2009), Hardin and Wu (2010), and Hardin and Hill (2011) examine the interaction between short-term debt

offerings and long-term sources of financing. Francis, Lys and Vincent (2004) show that REITs access capital markets more frequently than

industrial firms.

4 Reduced agency problems are attributable to the industry's high payouts to shareholders, while the latter point results from asset and income

restrictions that limit REITs to invest primarily in real estate.

5 In addition, REITs may provide an improved identification strategy by mitigating the potential endogenous nature of adverse selection problems.

Previous studies generally conclude that information asymmetry drives a substantial portion of SEO gross spreads but asymmetric information is not

directly observable, hence proxies vary across studies. Furthermore, these proxies may not be exogenous from omitted variables nor cross-industry

shocks (Lee and Masulis (2009). This endogeneity problem should be most severe in industries investing heavily in intangible assets and for firms

with greater free cash flow where both characteristics aggravate the adverse selection problem clouding causal inferences with respect to existing

gross spread determinants. Structural differences between equity REITs and non-REITs may attenuate the endogeneity concern. Later in the text, it is

noted that the relative REIT transparency argument is unresolved.

6Hardin and Hill (2011) examine the determinants of REIT line of credit rating and use and find that most publicly-traded equity REITs have access

to credit lines.

7Chou, Hardin, Hill, and Kelly (2011) find evidence of market value implications of the partnership structure for REITs. The market values of

discretionary dividends paid by REITs using the partnership structure, relative to non-OP REITs.

8The expanded market model is defined as: r i,k,t= α i,t + β1* r m,t + β2* r j,t+ β3* rk,t+ ε i,t,

where r i,k,t is the monthly return of REIT I in property k in year t, r m,t is the monthly CRSP value-weighted market return in year t, r j,t is the

monthly value-weighted return of the equity REIT’s industry in year t, and rk,t is the monthly value-weighted return of the equity REITs in property

k in year t.

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9Only 51 unique lead investment banks underwrote REIT SEOs between 1990 and 2007.

10

Consistent with this, Choe, Masulis and Nanda (1993) find that price reactions to industrial equity offerings are lower during high financing activity

in the market. Furthermore, Goodwin (2011) finds a negative relation between underpricing of REIT SEOs and primary market activity.

11

Discounting measures the difference between closing price on the day prior to the SEO issue date and offer price. On the other hand, underpricing

is defined as the difference between the closing price on the issue date and offer price. Discounting and underpricing are analogous, and represent the

indirect costs associated with SEOs (Altinkilic and Hansen (2003).

12

Lease, Masulis, and Page (1991) shows that stated offer dates are often not accurate since most offers actually take place after the trading is closed.

Following Safieddine and Wilhelm (1996), corrections to the offer dates provided in Securities Data Corporation (SDC) New Issues Database are as

follows. If the trading volume on day following the reported offer date is (1) more than twice the trading volume on the offer data on SDC and (2)

more than twice the average daily trading volume over the previous 250 trading days, then the trading day after the reported offer day on SDC is

selected as the corrected offer date. This methodology results in offer date corrections for 54% of the sample.

13

Goodwin (2011) argues that discounting is a more appropriate measure of the indirect cost of issuance when analyzing SEOs. Thus, discounting is

used as a proxy to capture indirect cost of SEOs. However, the results are qualitatively similar when the models are run again with the underpricing

variable taking the place of the discounting. An anonymous referee provided this point.

14

SEOs are typically underwritten by syndicates of managing, underwriting, and selling groups. The managing group is responsible for structuring

the syndicate, and typically receives 20% of gross spread for its services. Along with the managing group, underwriting group make an underwriting

commitment for an agreed upon number of shares, and conduct the bookbuilding process. For these services, underwriters also generally receive 20%

of the gross spread. Finally, managing underwriters also assemble a selling group, and typically gets 60% of the gross spread for selling the shares to

retail as well as institutional customers. While 20/20/60 division is perceived as widely standard in the industrial literature, Torstilla (2001) finds

significant deviations from 20/20/60 split for industrial IPOs. Similarly, untabulated results show that only 103 out of 460 REIT SEOs provide a

20/20/60 split.

15

The specific source used here is REIT Watch, NAREIT’s monthly statistical report that lists firm name, ticker, investment focus, and property

focus for equity, mortgage, and hybrid REITs comprising their REIT return indices.

16

In a firm commitment contract, a syndicate of investment banks guarantees to buy an issuer’s equity offering at an offer price discount. The

discount is compensation for bearing the price risk associated with reselling the shares to the public following the agreement. This compensation or

discount is called underwriter gross spread, and represents a substantial portion of total flotation costs (Lee and Masulis (2009)).

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17

It should be noted that SNL does not provide historical data on REITs' use of the UPREIT structure, as SNL backfills the UPREIT field. Thus,

when one pulls the UPREIT variable for a time-series, the researcher will note that the variable exhibits no within-REIT variation. An anonymous

reviewer indicated this to the authors.

18

Goodwin (2011) shows a significantly lower level of discounting for REIT SEOs during periods of high financing activity in the overall market.

19

Data on the breakdown of investment bank fees is also retrieved from the Securities Data Corporation (SDC) New Issues Database.

20

Because of the tradeoff between bias and efficiency, emphasis is given to the result from the full model. That is, since the primary concern is

omitted variables bias, relative to less efficient standard errors, results shown across columns 1 and 4 receive emphasis. This approach parallels

Greene’s (2007) “general-to-simple” modeling strategy (pages 136-137).

21

Chan, Stohs and Wang (2001) find no statistical difference between REITs and non-REITs for a sample of REIT IPOs listed in Hong Kong Stock

Exchange.

22

Results are qualitatively and quantitatively similar when excluding industrial SEOs from the computation of total SEO proceeds.

23

Specifically, Transparency for industrials is defined as ri,,t= α i,t + β1* r m,t+ ε i,t where r i,k,t is the monthly return of the non-REIT issuer in year t,

and rm,t is the monthly CRSP value-weighted market return.

24

This suggestion was provided by an anonymous reviewer.

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