Journal of Real Estate Research

ISSN: 0896-5803 (Print) 2691-1175 (Online) Journal homepage: https://www.tandfonline.com/loi/rjer20

The Performance of Acquisitions in the Real Estate

Investment Trust Industry

Sahin Olgun

To cite this article: Sahin Olgun (2005) The Performance of Acquisitions in the Real
Estate Investment Trust Industry, Journal of Real Estate Research, 27:3, 321-342, DOI:
10.1080/10835547.2005.12091161

To link to this article: https://doi.org/10.1080/10835547.2005.12091161

Published online: 17 Jun 2020.

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The Performance of Acquisitions in the
R e a l E s t a t e I n v e s t m e n t Tr u s t I n d u s t r y

Author O l g u n F. S a h i n

Abstract This study examines the performance of acquisitions in the Real

Estate Investment Trust (REIT) industry around the acquisition
announcement and in the long-run. The results suggest that the
acquiring REITs experience statistically significant negative
abnormal returns while the target REITs earn statistically
significant positive abnormal returns during the three-day period
around the announcement. The long-run performance of the
acquiring REITs is analyzed using size benchmark portfolios
with the buy-and-hold, cumulative average and mean calendar
time abnormal returns, as well as the Fama–French Three Factor
Model. None of the other methods detect significant abnormal
returns in the long-run with the exception of the buy-and-hold
abnormal return. Further analysis shows that the long-run
positive buy-and-hold abnormal return is consistent with an
unexpected decline in cost of equity after acquisitions.

Introduction

The Real Estate Investment Trust (REIT) industry experienced relatively

significant consolidation activity during 1990s. These acquisitions raise questions
on the wealth effects in the short- and long-run for shareholders. Generally, firms
make acquisitions for several reasons, such as market power, synergies in
operations, removal of inefficient management, reduction of bankruptcy costs and
tax loss benefits. The findings of previous studies suggest that the acquiring
firm shareholders experience non-significant abnormal returns, while target
shareholders earn significant positive abnormal returns around acquisition
announcements. The long-run performance of the acquiring firms is not resolved.
Early studies identify significantly negative abnormal returns to acquiring firms,
although recent research points out problems associated with risk adjustment
methods and biases in test statistics.
This study examines the performance of REITs involved in acquisitions around
the announcement and during a three-year period after the announcement. The
market reaction to acquisition announcements reflects the market’s assessment of
acquisitions. The adjustment resulting from acquisition announcements in an

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efficient market takes place quickly, allowing no abnormal performance in the

long-run or gradual adjustments over time. Therefore, the short-run analysis
reflects the market’s view about acquisitions while the long-run analysis has
implications regarding market efficiency.
The sample includes thirty-five acquisition transactions among REITs between
1994 and 1998. The market model and the market-adjusted return are used to
estimate the announcement period abnormal returns. The results suggest that the
acquiring REITs experience statistically significant negative abnormal returns
while the target REITs earn statistically significant positive abnormal returns
during the three-day period around the announcement.
There are studies that examine the announcement period abnormal returns.
However, the long-run performance of acquiring REITs has not been documented.
In this study, the performance of an acquiring REIT is compared to a benchmark
portfolio based on firm sizes measured by the market value of equity. The study
utilizes four methods of abnormal return calculations after acquisitions: the
Cumulative Average Abnormal Return (CAAR), the Buy-and-Hold Abnormal
Return (BHAR), the Mean Calendar-Time Abnormal Return (MCTAR) and the
Fama–French Three Factor Model. No method detects significant abnormal returns
in the long-run with the exception of the BHAR. The study also examines changes
in cost of equity for acquiring REITs after the event. The findings suggest that
the long-run positive buy-and-hold abnormal return is consistent with an
unexpected decline in cost of equity after acquisitions.

兩 Literature Review and Hypotheses

Allen and Sirmans (1987) examine the performance of thirty-eight successful
acquisitions among REITs over the 1977–1983 period. The sample acquisitions
are collected from Moody’s Bank and Finance Manual. Allen and Sirmans use
the mean adjusted return method to determine the abnormal performance of
acquiring REITs. The mean returns of sample firms are calculated using the data
for days (⫺120, ⫺40) relative to the announcement day. The abnormal return,
which is the event firm return minus its mean return, is estimated over days (⫺40,
⫹40). The results of suggest that acquiring REIT firms experience a statistically
significant CAAR of 8.47% over days (⫺10, 0) prior to the announcement. The
CAAR for days (⫹1, ⫹40) is 0.71% and insignificant. The authors suggest that
the pre-announcement gains might be due to improved managerial efficiency. To
test for improved managerial efficiency, they identify the related and unrelated
acquisitions. The assumption is that the related acquisitions lead to improved
managerial and financial performance. The related acquisitions earn a statistically
significant higher return (2.02%) than the unrelated acquisitions over days
(⫺1, 0).
McIntosh, Officer and Born (1989) analyze the impact of acquisitions on specific
target REITs. The sample includes twenty-three REITs that were subject to
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 2 3

takeovers between July 1962 and December 1986. The authors use the market
model to determine the performance of the REITs. In successful acquisitions, the
REITs experience a significant abnormal return of 3.34% during the day before
the announcement of the acquisition in The Wall Street Journal. The abnormal
returns are small and insignificant over days (⫹1, ⫹30).
Campbell, Ghosh and Sirmans (1998) calculate the three- and five-day abnormal
returns for acquiring the target REITs. The sample contains twenty-five
transactions that took place between January 1989 and January 1998. Because the
sample period ends at the beginning of January, a significant number of
acquisitions that took place in 1998 are not included. The study finds that
acquiring REITs lose ⫺1.1% while target shareholders gain 5.2% over the five-
day period (⫺2, ⫹2) relative to the announcement. The returns are adjusted based
on the Willshire Daily REIT Index. Unfortunately, the statistical significance of
these results is not reported.
Campbell, Ghosh and Sirmans (2001) analyze the information content of the
payment method in REIT acquisitions involving publicly traded acquiring and
target REITs and privately held target REITs. The sample contains eighty-five
transactions (of which forty involve publicly traded REITs) between 1994 and
1998. The three-day (⫺1, ⫹1) abnormal return for acquiring and target REITs are
⫺0.6% and 3.0%, respectively. The study attributes the negative market reaction
to the information signaling that the stock is overvalued.
This study examines the market performance of REITs involved in acquisitions
around the announcement and during a three-year period after the announcement.
The market reaction to acquisition announcements provides insights on how the
market views the future prospects of acquisitions. To examine the possible wealth
effects around the announcement, this study tests the hypotheses that there are no
abnormal returns to shareholders of acquiring and target firms. In efficient markets,
event firm prices quickly reflect the impact of acquisitions allowing no abnormal
performance in the long-run or gradual adjustments over time. The study also tests
the hypothesis that the long-run performance of acquiring firms is not significantly
different from zero. The announcement period results reflect the market’s view
about acquisitions while the long-run analysis has implications regarding market
efficiency.

兩 Data and Methodology

Data

In order to identify the acquisitions, the CRSP database is searched for REITs
delisted between 1990 and 2000 due to acquisitions (delisting codes between 200
and 203). The 2001 edition of the Directory of Obsolete Securities, published by
Financial Information Incorporated, is used to identify acquiring REITs for each

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delisted REIT. The Wall Street Journal Index is searched to identify the
announcement dates of these acquisitions. The resulting sample contains thirty-
five transactions among REITs. Due to data availability, the number of acquiring
REITs included in the analyses varies. Panels A and B of Exhibit 1 show the
distribution of acquisition announcements over time and the market value data as
of two days prior to the announcements, respectively. REIT returns are obtained
from the CRSP.

Methodology

The standard market model and the market-adjusted return are used to measure
the abnormal returns during the announcement period, days (⫺1, ⫹1). The
parameters of the market model and market-adjusted return are estimated using
the data over days (⫺200, ⫺21). The significance of the market model and market-
adjusted return is conducted following Bosch and Hirschey (1989) and Beneish
and Gardner (1995), respectively. The market in both models is represented by
the CRSP value-weighted market index and a value-weighted REIT index
constructed to include only non-event REITs.
The abnormal dollar return method of Malatesta (1983) is also applied to assess
the wealth effects of acquisitions in absolute terms. Malatesta defines the dollar
abnormal return as the price of an acquiring firm times the number of shares
outstanding (both taken two days before the announcement date) times the
abnormal return over days (⫺1, ⫹1). Moeller, Schlingemann and Stulz (2003)
estimate the percentage net present value (NPV) of acquisitions. The net present
value of a transaction is the same as the dollar abnormal return of Malatesta.
Moeller, Schlingemann and Stulz divide the acquiring firm NPV by the total
transaction value to determine the percentage NPV.
The long-run performance of acquiring REITs is measured for a three-year period.
The benchmark portfolios are constructed based on the market values of non-event
REITs, following the evidence suggested by McIntosh, Liang and Tompkins
(1991) and Chen, Hsieh, Vines and Chiou (1998). The benchmark portfolios are
formed as follows: At the end of each month, all REITs are ranked based on
market values (price per share times the number of shares outstanding) and placed
into quintile portfolios. The number of REITs used to form these benchmark
portfolios are provided in Panel C of Exhibit 1. The event firm returns are
calculated starting with the first trading day of the next calendar month to allow
for benchmark portfolio formation. The expected returns of acquiring REITs are
represented by the returns on the corresponding size portfolios. This study utilizes
three techniques for calculating abnormal returns: the CAAR, the BHAR and the
MCTAR.
Early research on long-run performance after corporate events estimates abnormal
performance using the CAAR. The CAAR is estimated as follows:
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 2 5

E x h i b i t 1 兩 Sample Characteristics

Panel A: Announcements during the sample period

Year Announcements

1994 2
1995 4
1996 7
1997 8
1998 14
Total 35

Panel B: Market value statistics of acquiring and target firms (in thousands except
number of firms)

Acquirer Target

Average 1,240,896 431,311

Std Dev. 1,278,342 453,686
Min. 13,262 11,673
Max. 5,088,552 2,028,109
Med. 756,550 284,646
Firms 32 33

Panel C: Number of REITs used to form size benchmark portfolios (annual average
of monthly number of REITs)

Year REITs

1994 231
1995 238
1996 228
1997 221
1998 232

Notes: In order to identify the acquisitions, the CRSP database is searched for REITs delisted
between 1990 and 2000 due to acquisitions identified by the delisting codes between 200 and
203. The Wall Street Journal Index is searched to identify the announcement dates of these
acquisitions. The resulting sample contains 35 transactions announced and completed between
January 1994 and December 2000. Panel B of the table is based on market values as of two
days prior to the acquisition announcements for firms with available data.

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ari,t ⫽ ri,t ⫽ E(ri,t), (1)

where t is the month relative to the event month, ari,t is the abnormal return on
asset i for month t, ri,t is the return on asset i for month t and E(ri,t) is the expected
rate of return on asset i for month t. The Average Abnormal Return (AARt) on a
portfolio of N stocks for event month t is:

冘 ar .
N
1
AARt ⫽ i,t (2)
N i⫽1

The CAAR from event month q to event month s is:

冘 AAR .
s
CAARq,s ⫽ t (3)
t⫽q

Ritter (1991) calculates the t-Statistic for AARt for each month as:

兹Nt
t-Statistic ⫽ AARt , (4)
sdt

where sdt is the cross-sectional standard deviation of the adjusted return for month
t. The t-Statistic is used to form the hypothesis that the ARR of sample firms
during event month t is equal to zero.
The t-Statistic for CAAR1,t is computed as follows:

兹Nt
t-Statistic ⫽ CAAR1,t , (5)
csdt

and

csdt ⫽ 兹(t)(var) ⫹ 2(t ⫺ 1)cov, (6)

 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 2 7

where t is the event month, var is the average cross-sectional variance over the
assumed time horizon and cov is the first-order auto-covariance of the AARt series.
The t-Statistic tests the hypothesis that the CAAR over months (q, s) relative to
the event month is equal to zero.
There are conceptual and statistical problems associated with the use of the CAAR
to measure the abnormal performance in the long-run. The CAAR does not
measure the actual investor experience and ignores the compounding of returns
that provides biased results according to Barber and Lyon (1997). Conrad and
Kaul (1993) show that the CAAR method cumulates not only the actual abnormal
returns, but also the upward or downward biases in periodic returns. This might
be due to the bid-ask effect over long periods leading to substantially high or low
CAARs. However, Fama (1998) suggests that despite problems associated with
the CAAR methodology, it still experiences fewer statistical inference problems
than its alternative, the BHAR method.
Since Ritter (1991), the BHAR has become one of the most commonly used
measures of long-run performance. Following Mitchell and Stafford (2000), the
BHAR on firm i over T period can be calculated as:

写 (1 ⫹ r ) ⫺ 写 (1 ⫹ t
T T
BHARi ⫽ i,t ).
control,t (7)
t⫽1 t⫽1

The average BHAR over N firms is:

冘 BHAR .
N
1
BHAR ⫽ i (8)
N i⫽1

The t-Statistic for the BHAR is:

兹N
t-Statistic ⫽ BHAR , (9)
␴BHAR

where ␴BHAR is the cross-sectional standard deviation of individual firm BHARs.

The t-Statistic tests the hypothesis that the mean buy-and-hold abnormal return of
sample firms over T period after the event is equal to zero.
Although the BHAR takes into account the investor experience, it suffers from
skewness and cross-sectional dependence problems. Barber and Lyon (1997)

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suggest that long-run BHARs are positively skewed because it is possible to

observe an event firm return greater than 100%, although not on a control
portfolio. The positive skewness of the BHARs leads to an inflated estimate of
the cross-sectional standard deviation and, therefore, downwardly biased test
statistics. The effect of the cross-sectional dependence is the opposite. The cross-
sectional correlation in the BHARs leads to a tight distribution, which results in
upwardly biased test statistics. Pseudo-portfolios are used to compute the empirical
p-value under the null hypothesis of zero abnormal performance to solve the
skewness associated with the BHAR methodology.
Pseudo portfolios are used by Brock, Lakonishok and LeBaron (1992), Ikenberry,
Lakonishok and Vermaelen (1995) and Lee (1997) to generate the empirical p-
values. The method is based on generating the empirical distribution under the
null hypothesis of zero abnormal performance. For each event firm, a
representative firm with similar risk characteristics is chosen to be included in the
pseudo portfolio. This procedure is continued until all the event firms are
represented by non-event firms. The BHAR for firms in the pseudo portfolio is
calculated using the same method. The grand average of individual firm BHARs
yields an observation of abnormal return. The formation of the representative
portfolio is repeated 10,000 times, leading to 10,000 observations of abnormal
returns. Lee (1997) calculates the empirical p-value for 10,000 trials as:

empirical p-value
Number of trials with BHAR less than or equal to
sample BHAR
⫽ . (10)
10,000

Although the empirical p-value method eliminates the skewing bias, the cross-
sectional dependence is still problematic because the procedure assumes that the
BHARs are independent.
The MCTAR eliminates cross-sectional dependence. This method is based on
forming portfolios of firms that complete an event during the prior three-year
period. These portfolios are formed every month in calendar-time by adding new
firms and dropping firms that reach the end of the holding period. The cross-
sectional dependence is not problematic because portfolios are formed in calendar-
time. Following Lyon, Barber and Tsai (1999), the MCTAR is calculated as
follows:

ARi,t ⫽ Ri,t ⫺ Rp,t, (11)

 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 2 9

where t is the calendar month t, ARi,t is the abnormal return on firm i in calendar
month t, Ri,t is the actual return on firm i in calendar month t, and Rp,t is the return
on a control portfolio in calendar month t.
The MCTAR in calendar month t, is:

冘 x AR ,
nt

MCTARt ⫽ i,t i,t (12)

i⫽1

where nt is the number of firms in calendar month t, and xi,t is the weight for firm
i in calendar month t. The grand mean of monthly abnormal returns is:

冘 MCTAR ,
T
1
MCTAR ⫽ t (13)
T t⫽1

where T is the total number of months. A t-Statistic is calculated using the time-
series standard deviation of the mean monthly abnormal returns as follows:

兹T
t-Statistic ⫽ MCTAR . (14)
␴MCTAR

The t-Statistic tests the hypothesis that the mean monthly abnormal return of the
event firm portfolio is equal to zero during the study period. Jaffe (1974)
standardizes the monthly abnormal returns using within month variance and
Mitchell and Stafford (2000) require at least ten firms in any calendar month to
form a portfolio to adjust for heteroscedasticity, due to changing portfolio
composition over time.
This study also employs the Fama–French Three Factor Model based on Fama
and French (1992, 1993). Buttimer, Hyland and Sanders (2001) apply the Factor
Model to analyze the long-run performance of REIT Initial Public Offerings
(IPOs) between 1980 and 1992. These authors find no significant abnormal
performance except the 1980–1989 sub-period when IPO portfolio returns are
equally weighted. The following regression is estimated to examine the long-run
performance of acquiring REITs using the Fama–French Three Factor Model:

Rp,t ⫽ Rƒ,t ⫽ ␣p ⫹ ␤pRMRFt ⫹ spSMBt ⫹ hp HMLt ⫹ ep,t, (15)

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where Rp,t is the equal or value weighted monthly return on the event firm portfolio
in calendar month t, Rƒ,t is the risk-free rate of return, RMRFt is the excess return
on the value-weighted market portfolio, SMBt is the return difference between the
portfolios of small and large company stocks, HMLt is the return difference
between the portfolios of high and low book-to-market stocks and ␣p is the average
monthly abnormal return on the event portfolio of firms.1 The regression is run
for a 36-month period before and after the event, excluding the event month. The
test hypothesis is that ␣p is equal to zero.

兩 Results

Announcement Period Abnormal Returns

Exhibit 2 shows the market model and market-adjusted abnormal returns for
acquiring and target REITs over days (⫺1, ⫹1) relative to the day of the
announcement. Abnormal returns could not be estimated for five acquiring and
two target REITs because the market model and market-adjusted return require
historical return data. Both models identify statistically significant abnormal
returns to target firms. The three-day abnormal return for target REITs varies
between 4.31% and 4.45%, depending on the assumed market portfolio and
estimation procedure for abnormal returns. The abnormal returns for target REITs
are statistically significant. Although small in magnitude, the three-day abnormal
returns for acquiring REITs are ⫺1.21% and ⫺1.16% using the market model and
the market-adjusted return with the CRSP value-weighted market index,
respectively. The abnormal return figures are statistically significant for the
acquiring firms as well. When the value-weighted REIT index is used, similar
abnormal returns for acquiring REITs are identified.
These findings are consistent with Campbell, Ghosh and Sirmans (1998, 2001)
that acquiring firms experience small negative returns while target shareholders
gain around the time of the announcement. On the other hand, the findings
contradict Allen and Sirmans (1987) that acquiring REIT shareholders benefit
from acquisitions.2 Moreover, the results indicate lower gains to target REIT
shareholders during the announcement period, as opposed to the findings of
McIntosh, Officer and Born (1989).3 Differences in sample periods may account
for the contradicting results since both groups use samples of acquisitions prior
to 1990.
Abnormal dollar returns around acquisition announcements are reported on
Exhibit 3. Calculations in Panel B of are based on Malatesta (1983). On average,
an acquiring REIT loses about $38.8 million while a target REIT gains about
$19.7 million over days (⫺1, ⫹1). In aggregate, acquiring REIT losses amount to
about $1.16 billion (for thirty acquiring REITs) while target gains are around
$649.87 million (for thirty-three target REITs). The aggregate dollar return for
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 3 1

E x h i b i t 2 兩 Abnormal Returns to Acquirer and Target REITs Around Acquisition Announcements

Panel A: Acquiring REIT performance around the announcement

CRSP Value-Weighted Market Index

Market Model Market-Adjusted

Abnormal return (⫺1, ⫹1) ⫺1.21 ⫺1.16

t-Statistics ⫺2.61*** ⫺2.26***
N 30 30

Value-Weighted REIT Index

Market Model Market-Adjusted

Abnormal return (⫺1, ⫹1) ⫺1.15 ⫺1.06

t-Statistics ⫺2.54*** ⫺2.33***
N 30 30

Panel B: Target REIT performance around the announcement

CRSP Value-Weighted Market Index

Market Model Market-Adjusted

Abnormal return (⫺1, ⫹1) 4.31 4.31

t-Statistics 9.15*** 8.40***
N 33 33

Value-Weighted REIT Index

Market Model Market-Adjusted

Abnormal return (⫺1, ⫹1) 4.45 4.39

t-Statistics 9.45*** 9.07***
N 33 33

Notes: This table shows the three-day (⫺1, ⫹1) cumulative abnormal returns around acquisition
announcements. The cumulative abnormal returns are estimated using the market model and the
market-adjusted return. Market model parameters are estimated using the data over days (⫺200,
⫺21) relative to the announcement. In Panel A, results are shown for acquirers. Panel B presents
the results for target REITs. The market portfolio is represented by the CRSP value-weighted market
index or value-weighted REIT index.
*** Significant at the 1% level.

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E x h i b i t 3 兩 Announcement Abnormal Returns, Dollar Abnormal Returns and Percentage NPV of Acquisitions

Acquirers Targets

Panel A: Abnormal return over days (⫺1, ⫹1) (in percent except the number of firms)

Mean ⫺1.21*** 4.31***

Median ⫺0.41* 5.07***
Negative percent 56.67 27.27
N 30 33

Panel B: Mean and total abnormal dollar returns over days (⫺1, ⫹1)

Mean dollar return ⫺35,206,329 17,819,971

Mean dollar return (2001) ⫺38,775,809 19,692,987
Total dollar return ⫺1,056,189,873 588,059,044
Total dollar return (2001) ⫺1,163,274,282 649,868,562
N 30 33

Panel C: Percentage NPV of acquisitions over days (⫺1, ⫹1)

Mean percent NPV ⫺5.31**

Median percent NPV ⫺1.02*
Negative percent 58.62
N 29

Notes: Panel A reports the market model abnormal returns over days (⫺1, ⫹1). Calculations in
Panel B of the table are based on Malatesta (1986). The author defines the dollar abnormal return
as the price of an acquiring firm times the number of shares outstanding (both taken two days
before the announcement date) times the abnormal return over days (⫺1, ⫹1). Mean and total
abnormal dollar returns are reported in current and 2001 dollars. Panel C shows percentage NPV
of acquisitions. The NPV of a transaction is the same as the dollar abnormal return of Malatesta
(1986). Moeller, Schlingemann and Stulz (2003) divide the acquiring firm NPV by the total
transaction value to determine the percentage NPV. Reported percent NPVs are based on
acquiring NPV divided by the market value of the target two days before the announcement. The
number of percentage NPV observations is one fewer because one of the target firm’s market
value could not be calculated due to lack of data availability. The test of significance for the
median is based on the sign test.
* Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 3 3

acquiring REITs is likely to be underestimated because of the disproportionate

number of REITs. Panel C of shows the percentage NPV of acquisitions. The
percentage NPV of a transaction is the dollar abnormal return divided by the total
transaction value. Reported percentage NPVs are based on the acquiring NPV
divided by the market value of the target REIT two days before the announcement.
The total number of NPV observations is one less because a target firm’s market
value could not be calculated due to lack of data availability. According to the
results, the mean percentage NPV is ⫺5.31% and significant. Given the findings,
it appears that target REIT shareholders benefit from acquisitions while acquiring
REIT shareholders face losses at the announcement.

Acquiring REIT Performance in the Long-Run

Exhibit 4 presents the results of the AAR and the CAAR for acquiring REITs.
The CAAR reaches the highest level during the eighth month and falls below zero
during the twelfth month. The CAAR is ⫺1.41% over the 36-month period.
Neither the AARs nor the CAARs are significant in any month after the
announcement.
Panel A of Exhibit 5 reports the BHAR. The average BHAR for acquiring REITs
is 3.56% during the three-year period after the announcement and insignificant
using the conventional t-Statistic. The cross-sectional standard deviation of
acquiring REIT BHARs is 37.41%. The median BHAR is 11.62% and is
significant at the 10% level. Approximately 26% of the acquiring REITs
experience negative BHARs. Pseudo-portfolios are formed to calculate the
empirical p-value to eliminate the potential skewness problem.
Panel B of Exhibit 5 suggests that the empirical p-value of 3.56% means the
BHAR is 0.72, indicating that 72% of the time non-event firm portfolio BHARs
are below the sample BHAR. The median BHAR of 11.62% has an empirical p-
value of .953, which indicates significance at the 5% level. The mean of the
simulation procedure is ⫺0.13% and the standard error is 0.10% after 5,000
iterations. Fifty-two percent of the time pseudo-portfolios have negative abnormal
returns. Exhibit 6 shows the distribution of the pseudo-portfolio BHARs. The
sample REIT portfolio BHAR clearly does not fall outside of the critical values
of the distribution generated under the null hypothesis of zero abnormal
performance.
The result of the MCTAR method is reported on Exhibit 7. The portfolios are
formed in calendar-time to account for cross-sectional dependence. Each event
firm is held in the portfolio for thirty-six months. Since the calendar-time
portfolios are formed each month, portfolio composition changes every month. If
there are fewer than ten event REITs in a month, that particular month is not
included in the statistical testing. The portfolio return is calculated using equal-
and value-weighted individual REIT returns each month. The average abnormal
returns are ⫺0.01% and 0.19% per month or ⫺0.07% and 2.32% per year using

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3 3 4 兩 S a h i n

E x h i b i t 4 兩 Average Abnormal Return (AAR) and Cumulative Average Abnormal Return (CAAR) to Acquirers

Month Number of Firms AAR t-Statistics CAAR t-Statistics

1 31 1.08 1.12 1.08 0.99

2 31 ⫺0.82 ⫺0.94 0.27 0.18
3 31 0.32 0.35 0.59 0.32
4 31 0.52 0.59 1.11 0.52
5 31 ⫺0.03 ⫺0.05 1.07 0.45
6 31 0.66 0.66 1.74 0.67
7 31 ⫺0.19 ⫺0.20 1.55 0.55
8 31 0.49 0.62 2.04 0.68
9 31 ⫺0.17 ⫺0.27 1.87 0.59
10 31 ⫺1.37 ⫺1.75 0.50 0.15
11 31 ⫺0.02 ⫺0.02 0.48 0.14
12 31 ⫺1.12 ⫺1.19 ⫺0.63 ⫺0.17
13 31 ⫺0.10 ⫺0.13 ⫺0.73 ⫺0.19
14 31 0.47 0.75 ⫺0.26 ⫺0.07
15 31 0.36 0.41 0.09 0.02
16 31 ⫺0.12 ⫺0.15 ⫺0.03 ⫺0.01
17 31 ⫺0.16 ⫺0.20 ⫺0.19 ⫺0.04
18 31 ⫺0.10 ⫺0.15 ⫺0.30 ⫺0.07
19 31 1.41 1.49 1.11 0.24
20 31 ⫺0.92 ⫺0.92 0.18 0.04
21 31 ⫺1.47 ⫺1.12 ⫺1.29 ⫺0.27
22 31 ⫺0.77 ⫺0.72 ⫺2.06 ⫺0.42
23 31 ⫺2.87 ⫺1.21 ⫺4.92 ⫺0.98
24 31 1.50 1.15 ⫺3.42 ⫺0.66
25 31 ⫺0.86 ⫺0.48 ⫺4.27 ⫺0.81
26 31 ⫺0.23 ⫺0.42 ⫺4.50 ⫺0.84
27 31 1.07 1.55 ⫺3.44 ⫺0.63
28 30 ⫺1.57 ⫺1.56 ⫺5.01 ⫺0.89
29 30 ⫺0.21 ⫺0.18 ⫺5.22 ⫺0.91
30 30 ⫺0.67 ⫺0.31 ⫺5.89 ⫺1.01
31 30 1.07 0.97 ⫺4.82 ⫺0.81
32 30 ⫺0.83 ⫺0.77 ⫺5.65 ⫺0.93
34 30 ⫺0.47 ⫺0.51 ⫺6.11 ⫺1.00
35 29 3.01 1.63 ⫺3.10 ⫺0.49
36 29 1.69 1.51 ⫺1.41 ⫺0.22

Notes: The abnormal returns on each acquiring firm are generated using size matching portfolios.
Each month represents twenty-one trading days, starting two days after the announcement. The
test statistics are generated by following Ritter (1991).
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 3 5

E x h i b i t 5 兩 Three Year Buy-and-Hold Abnormal Return (BHAR) to Acquirers

Panel A: Conventional t-Statistic

Mean BHAR 3.56

Cross-sectional standard deviation 37.41
t-Statistic 0.53
Median 11.62*
Negative percent 25.81
N 31

Panel B: Pseudo portfolios

Mean BHAR of the sample 3.56

Empirical p-value 0.72

Notes: BHARs are calculated using size-matching portfolios. The matching portfolios are formed at
the end of every month by ranking all REITs based on market values. Panel A reports the
conventional t-Statistic and sign test for the median. Panel B shows the results of the simulation
procedure to generate BHARs under the null hypothesis of zero abnormal performance. The
simulation procedure employed requires random selection of a non-event REIT for each actual
event REIT matched based on size portfolio assignment. Abnormal returns for the non-event REITs
are calculated the same way as actual event REITs. After forming a pseudo portfolio of non-event
REITs, the mean BHAR of the portfolio is computed. This formation is repeated 5,000 times to
generate the empirical p-value. The empirical p-value for the sample is the number of trials with
BHAR less than or equal to sample BHAR divided by 5,000.
* Significant at the 10% level.

equal and value weights, respectively. Although these abnormal returns are not
statistically significant, they suggest that large REITs perform better after the
acquisitions than smaller REITs.
The results of the Fama–French Three Factor Model are reported on Exhibit 8.
The Fama–French Three Factor Model does not adequately capture the acquiring
REIT returns, especially during the pre-event period. This indicates that there
might be other significant factors in explaining REIT returns. The acquiring REITs
experience insignificant positive abnormal returns during the 36-month pre-event
period. Intercepts of the post event regressions are negative with equal and value
weighting; however, they are not statistically significant. Additionally, the
abnormal return of value-weighted portfolios is half the abnormal return of equal-
weighted portfolios, which indicates that large REITs perform better than small
REITs.
The analysis thus far shows that there is some evidence of positive abnormal
performance after acquisitions based on the BHAR method. The next section of
this study addresses potential explanations of positive abnormal performance.

J R E R 兩 Vo l . 2 7 兩 N o . 3 – 2 0 0 5
 3 3 6
兩
S a h i n
E x h i b i t 6 兩 Frequency Distribution under the Null Hypothesis

700

600

500
Frequency

400

300

200

100

0%

0%

0%

0%

0%
%

%
%

0%

0%

00

00

00
00

00

00

00

.0

.0

.0

.0

.0
.0

.0
4.

0.

6.

2.

0.

4.

8.

12

16

20

24

28
-8

-4
-2

-2

-1

-1

This graph shows the frequency distribution of pseudo portfolio BHARs after 5,000 simulations. Each bar represents the number of times a particular value of BHAR is
observed for size matching portfolio of non-event REITs. Sample mean and median BHARs are 3.56% and 11.62%, respectively.
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 3 7

E x h i b i t 7 兩 Mean Monthly Calendar-Time Abnormal Return (MCTAR)

Equal-Weighted Value-Weighted

Mean calendar-time abnormal return ⫺0.01 0.19

t-Statistics 0.43 0.10
Number of months 49 49

Notes: Results are based on forming portfolios of event firms in calendar time. Abnormal return
for each firm in each calendar month is calculated by using the size-matching portfolios. A
calendar-time portfolio is formed only if there are ten REITs that acquire other REITs during the last
36-month period. An event firm is kept in the portfolio for 36 months after the announcement of
the acquisition. The t-Statistics are computed on abnormal returns that are standardized by within-
month variance, which changes the sign of the statistics for equal-weighted calendar-time
portfolios.

Boehme and Sorescu (2002) suggest that in an Efficient Markets framework, post
event positive abnormal returns can have two explanations that are not mutually
exclusive and are jointly complete. First, a decrease in the Factor Model
coefficients indicates an unexpected reduction in the cost of equity that is not
related to acquisitions. The post event lower cost of equity is not anticipated at
the announcement. As investors realize the lower cost of equity, returns improve.
Second, according to Fama and French (1997), decreases in the Factor Model
coefficients are related to unexpectedly improved cash flows. If unexpectedly high
performing firms dominate a sample, the positive abnormal performance and lower
Factor Model coefficients are likely to be observed. Boehme and Sorescu do not
offer a test for the second potential explanation.

Risk Changes and the Long-Run Performance

Boehme and Sorescu (2002) test the first explanation by estimating the following
firm level Fama–French Three Factor Model regression:

Ri,t ⫺ Rƒ,t ⫽ ␣i ⫹ Dt␣⌬i ⫹ ␤iRMRFt ⫹ siSMBt ⫹ hiHMLt

⫹ ␤⌬iDt RMRFt ⫹ s⌬i DtSMBt ⫹ h⌬iDt HMLt ⫹ ei,t,
(16)

where Ri,t is the return of an acquiring or target REIT, Rƒ,t is the one-month
Treasury bill rate, RMRFt is the excess return on the value-weighted market
portfolio, SMBt is the return difference between the portfolios of small and large

J R E R 兩 Vo l . 2 7 兩 N o . 3 – 2 0 0 5
3 3 8 兩 S a h i n

E x h i b i t 8 兩 The Fama–French Three Factor Model

Acquirers Targets

Pre-event Post event Pre-event

Panel A: Equal-weighted portfolios

Intercept 0.33 ⫺0.50 0.19

(0.66) (⫺1.29) (0.44)
RMRF 0.55*** 0.65*** 0.47***
(3.24) (6.50) (3.25)
SMB 0.55*** 0.32*** 0.51***
(2.88) (3.59) (3.12)
HML 0.71*** 0.75*** 0.51**
(2.62) (6.22) (2.23)
Adj. R 2 0.19 0.48 0.21

Panel B: Value-weighted portfolios

Intercept 0.37 ⫺0.26 ⫺0.21

(0.68) (⫺0.53) (⫺0.47)
RMRF 0.64*** 0.68*** 0.56***
(3.44) (5.31) (3.51)
SMB 0.53** 0.34*** 0.49***
(2.55) (3.02) (2.76)
HML 0.68** 0.82*** 0.60**
(2.33) (5.34) (2.38)
Adj. R 2 0.19 0.38 0.20

Notes: The Fama–French Three Factor Model is based on the following regression:

Rp,t ⫺ Rf,t ⫽ ␣p ⫹ ␤pRMRFt ⫹ spSMBt ⫹ hpHMLt ⫹ ␧p,t,

where Rp,t is the value or equal-weighted returns on the acquiring or target REIT portfolio, Rf,t is
the one-month Treasury bill rate; RMRFt is the excess return on the value-weighted market
portfolio; SMBt is the return difference between a portfolio of small and a portfolio of large firms;
and HMLt is the return difference between a portfolio of high book-to-market stocks and a
portfolio of low book-to-market stocks. The regression is run for 36-month periods before and
after the event, excluding the event month. The Model for target REITs is estimated for the pre-
event period. The regression provides coefficients of ␤p, sp and hp. The intercept term, ␣p,
measures the mean monthly abnormal return.
** Significant at the 5% level.
*** Significant at the 1% level.
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 3 9

E x h i b i t 9 兩 The Fama–French Three Factor Model and Post Event Risk Changes

Acquirers Targets

Panel A: Average pre-event coefficients

␤i 0.5998*** 0.3598**
(7.61) (2.23)
si 0.6053*** 0.4515***
(8.34) (4.18)
hi 0.7488*** 0.3776**
(7.28) (2.38)

Panel B: Average change in coefficients

␤⌬i 0.0029
(0.04)
s⌬i ⫺0.2474***
(⫺3.02)
h⌬i ⫺0.0131
(⫺0.12)

Panel C: Average monthly change in the required return due to each Fama–French Factor loading
(percent per month)

RMRF 0.003
(0.06)
SMB ⫺0.014***
(⫺2.92)
HML ⫺0.009
(⫺0.11)

Notes: The Fama–French Three Factor Model is based on the following event firm regressions:

Ri,t ⫺ Rf,t ⫽ ␣i ⫹ Di␣⌬i ⫹ ␤1RMRFt ⫹ siSMBt ⫹ hiHMLt

⫹ ␤⌬iDtRMRFt ⫹ s⌬iDtSMBt ⫹ h⌬iDtHMLt ⫹ ei,t,

where Ri,t is the return of an acquiring or target REIT, Rf,t is the one-month Treasury bill rate; RMRFt
is the excess return on the value-weighted market portfolio; SMBt is the return difference between
a portfolio of small and a portfolio of large firms; and HMLt is the return difference between a
portfolio of high book-to-market stocks and a portfolio of low book-to-market stocks. The firm
specific regressions for acquirers are run over the months (⫺36, ⫹36) excluding the event month.
Dt is one if a month is in the post event period and zero otherwise. The regression provides
coefficients of ␤i, si and hi for the pre-event period and ␤⌬i, s⌬i and h⌬i as the post event changes
in the Fama–French Three Factor Model loadings. The regressions for target REITs are run for the
36-month pre-event period. Percentage changes are estimated by multiplying the average factor
loading changes by the average of the Fama–French Factors over the period from August 1992 to
November 2001.
** Significant at the 5% level.
*** Significant at the 1% level.

J R E R 兩 Vo l . 2 7 兩 N o . 3 – 2 0 0 5
 3 4 0 兩 S a h i n

company stocks and HMLt is the return difference between the portfolios of high
and low book-to-market stocks. The firm-specific regressions for acquiring firms
are run over the months (⫺36, ⫹36) excluding the event month. Dt is set to one
if the month is in the post event period and zero otherwise. The regression
provides coefficients of ␤i, si and hi for the pre-event period and ␤⌬i, s⌬i and h⌬i
as the post event changes in the Fama–French Three Factor Model loadings. The
regressions for target REITs are run for the 36-month pre-event period only.
The results of the regressions are reported in Exhibit 9. Panel A reports the pre-
event average factor loadings for acquiring and target REITs. Average changes in
factor loadings are shown in Panel B. Acquiring REITs display a loading increase
in the market factor with decreases in loadings of size and book-to-market factors.
The average change in the size factor loading is statistically significant. These
results indicate that REITs became more sensitive to the market factor and less
sensitive to size and book-to-market factors after acquisitions. The resulting
monthly percentage change in the required return is reported in Panel C.
Percentage changes are estimated by multiplying the average factor loading
changes by the average of the Fama–French factors over the period from August
1992 to November 2001. The time period reflects the window of months where
individual firm returns are used to estimate Equation (16). Panel C shows that the
average reduction in the required return on equity due to size factor is 0.014%
per month, which is significant. Overall, the results support the notion that an
unexpected post event decrease in the cost of equity might lead to improved stock
returns as investors realize the lower cost of equity.

兩 Conclusion
This study examines the performance of acquiring REITs around the acquisition
announcement and during the three-year period after the announcement. The
announcement period abnormal returns are estimated using the market model and
market-adjusted return where the market is represented by the CRSP equal-
weighted market index and a non-event REIT index. The results suggest that target
REITs experience statistically significant positive abnormal returns of 4.31%
during the three-day announcement window. The abnormal returns to acquiring
REITs are small and negative (⫺1.21%), and statistically significant. The results
of this and other studies suggest an important difference in the market response
to acquisitions in the REIT industry before and after 1990. Acquisitions prior to
1990 resulted in positive abnormal returns to acquirers [Allen and Sirmans (1987)]
while abnormal returns to acquirers were negative [Campbell, Ghosh and Sirmans
(1998, 2001) and the current study)] during the 1990s around the announcement.
To estimate the abnormal performance in the long-run, the firm size is used to
establish benchmark portfolios of REITs at the end of each month during the
study period. Abnormal returns are calculated and tested based on the CAAR, the
BHAR, the MCTAR and the Fama–French Three Factor Model. Excluding the
BHAR results, none of the methods detect significant abnormal returns in the
 T h e P e r f o r m a n c e o f A c q u i s i t i o n s 兩 3 4 1

long-run after acquisitions. The long-run performance is consistent with market

efficiency and any significant positive long-run performance appears to be related
to an unexpected decline in equity risk after acquisitions. The change in equity
risk indicates that REITs became less sensitive to the size factor of the Fama–
French Three Factor Model after acquisitions.

兩 Endnotes
1
Thanks to Kenneth R. French for kindly providing RMRF, SMB and HML factor returns
at his website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.
html.
2
Allen and Sirmans (1987) report a significant abnormal return of 5.78% over event days
(⫺10, 0) and an insignificant return of 1.66% over event days (⫹1, ⫹10). For the current
study, the abnormal returns are calculated to be ⫺1.49% for the first period and ⫺0.10%
for the second period. These abnormal returns are not statistically significant.
3
The cumulative abnormal return to target REITs in successful acquisitions over days (⫺1,
⫹1) is calculated to be 6.88% based on abnormal returns.

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The author wishes to thank two anonymous referees for their valuable comments.

Olgun F. Sahin, Minnesota State University–Moorhead, Moorhead, MN 56563 or

sahin@mnstate.edu.