Public versus Private Market Arbitrage: International Evidence for Listed Property Companies. Issue 3 (3rd July 2021)

• Record Type: Journal Article
• Authors: Woltering, René-Ojas; Downs, David H.; Sebastian, Steffen
• Is Part Of: Journal of real estate research. Volume 43:Issue 3(2021)
• Page Start: 355
• Page End: 381
• Publication Date: 2021-07-03
• Subjects: Public versus private market arbitrage -- net asset value -- value versus growth -- seasoned equity offerings; Real estate business -- United States -- Periodicals; Real estate investment -- United States -- Periodicals; Real estate business -- Periodicals; Periodicals; 333.330973
• DOI: 10.1080/08965803.2021.1985922
• Languages: English
• ISSNs: 0896-5803

Abstract

Abstract: This paper examines the performance of real estate firms that issue seasoned equity with the stated purpose of investing in private market assets. Prior literature documents that (i) firms, in general, underperform following a season equity offering and (ii) growth firms underperform value firms. We propose a stylized model where firms may arbitrage a public market premium relative to the private market by investing seasoned equity proceeds in the latter market. We hypothesize and test this "public versus private market arbitrage" hypothesis for an international sample of 531 listed property companies spanning 12 countries. Consistent with the predictions of our model, we find that growth firms, those with relatively higher public market values, outperform value firms only under the condition where the stated use of proceeds is for investment purposes as opposed to all other uses, i.e., not investment-related. Our empirical evidence is based on buy-and-hold abnormal returns, time-series portfolio regressions, and firm-level, cross-sectional analysis. Overall, our results are consistent with a value-added strategy of public versus private market arbitrage and highlight the key consideration in the related capital allocation decision.