Kevin C.H. Chiang

REITs in the decentralized investment industry

Existing studies provide conflicting results regarding whether real estate investment trusts (REITs) effectively optimize and diversify institutional portfolios. Based on the style analysis of Sharpe, we extend Liang and McIntosh’s study with a more complete set of asset classes over a longer sample period. We provide additional evidence suggesting that practicing analysts should include REITs as an asset class to optimize their portfolios. Specifically, our results show that the price behavior of REITs is unique and cannot be satisfactorily duplicated by combining equity, fixed‐income securities, and unsecuritized real estate. The time series of the styles on REITs indicates that it is difficult to ex ante produce returns on REITs without diversifying into REITs.

Further Evidence on the Performance of Funds of Funds: The Case of Real Estate Mutual Funds

Funds of funds (FOFs) are created when investment companies invest in other investment companies. Although the additional layer of fees incurred by FOFs has a negative effect on returns, there is empirical evidence that real estate FOFs generate superior performance net of fees and risk adjustments. The evidence is inconsistent with a growing consensus that most actively managed mutual funds do not, on average, generate excess returns after adjusting for fees and risk. This study explains this apparent contradiction and finds that most real estate FOFs do not outperform their benchmarks under alternative risk adjustment specifications.

The perception of dividends by professional investors

Purpose – To study the perception of dividends by the professional investor, for whom mutual fund managers are a proxy. The main line of research in dividends is based on using market data that are fit, ex post, to a cherished hypothesis. It is believed, however, that such data cannot measure motivation which is the underlying force behind generating market data. An understanding of motivation will give us more insight into the dividend paradox (why shareholders love dividends) than just the surface reality one can glean from market data. Design/methodology/approach - Using a survey instrument, the method of analysis (not methodology) is factor analysis and hierarchical grouping that uncovers three distinct groups of professional investors re their attitude towards dividend. This categorization clearly shows that the dividends are perceived differently by the groups found here. Thus, research in dividends cannot follow a traditional route in which the phenomenon is treated as universal, or something similar to a natural occurrence. Findings - Three groups from the more traditional: the more growth-oriented, aggressive; and a middle-of-the-road group are posited. Although there are some uniformly accepted tenets across the groups, nevertheless, the more traditional group attributes far more importance to dividends than the growth-oriented group. The latter group perceives dividends as something needed to pacify the shareholder. It is also concluded that none of the academic hypotheses contrived to explain dividend behavior can be supported by empirical evidence. The interesting result is, nevertheless, that the ex post group performance is not significantly different between each possible pairing of the three groups. Research limitations/implications - As all empirical research goes, results cannot be all-conclusive, because of time and participation in the sample. This fact alone should not grind to a halt all empirical work. This work is part of a segment of three different studies examining the perception of dividends by corporate managers, and across countries. The next logical step is obviously studying the perception of dividends by the non-professional investor. Originality/value - This kind of work was almost never done. This is a first, because unfortunately traditional research that dominates most finance journals does not believe that motivation counts. First, because it satisfies ones desire to better understand the dividend puzzle. But it should be of interest to all who want to study the dividend decision in the firm, and why shareholders love dividends, something entirely not rational as far as economic rationality goes.

Long‐run price behaviour of equity REITs: become more like common stocks after the early 1990s?

Purpose – The US real estate investment trust (REIT) market experienced a structural change in the early 1990s. This paper aims to examine the following two issues: is the equity REIT market movement positively linked with the stock market movement in the long‐run? If so, how does the long‐run relation between the two markets change after the early 1990s?Design/methodology/approach – This paper examines the long‐run relation between REIT prices and common stock prices within a four‐price system, i.e., REIT prices, common stock prices, bond prices, and private real estate prices, for two sub‐periods: 1978‐1993 and 1994‐2008. This study uses the more advanced Johansen procedure, which is more robust than the Engle‐Granger procedure, to test the co‐integrated relation.Findings – The results show that REITs behave like common stocks during the earlier 1978‐1993 sub‐period. In contrast, REITs become less like common stock and more like private real estate after the early 1990s structural change. These results ...

REIT idiosyncratic risk

Investors are told to hold a well‐diversified portfolio; when everyone does so, idiosyncratic risk is diversified away and does not enter the pricing equation in equilibrium. This study finds that the idiosyncratic risk of real estate investment trusts (REITs) appears to have an upward time trend during the vintage REIT era (1980–1992) and appears to trend downward during the new REIT era (1993–2006). This study also finds that this pattern appears to coincide with a reversion in the relation between REIT idiosyncratic risk and the excess returns of REITs. Specifically, during the vintage REIT era, the excess return of REITs is positively related to REIT idiosyncratic risk. After 1993, the excess return of REITs is negatively related to REIT idiosyncratic risk.

Offering price clusters and underpricing in the US primary market

This study extends the microstructure literature by examining the offering prices in the United States Initial Public Offering (IPO) market for the presence of clusters. It is found that the use of whole prices is more frequent in the IPO market than in secondary stock markets. Offering prices in the IPO market exhibit a dominant clustering at whole fives and tens (5s and 0s) that cannot be adequately explained by existing hypotheses. Unlike other studies on IPO underpricing, this study examines the impact of offering price clusters on the degree of underpricing. It is documented that whole-priced IPOs are underpriced more relative to fractional-priced IPOs. It is found that the negotiations hypothesis and the implicit collusion hypothesis are not adequate explanations and leave this puzzle to be resolved by future research.

REIT excess dividend and information asymmetry: evidence with taxable income

Purpose – US real estate investment trusts (REITs) typically distribute more dividends than required by tax regulations. This paper aims to focus on discretionary dividends, and examines the impact of information asymmetry on this excess component of dividends.Design/methodology/approach – This paper considers a set of US REITs with reported taxable income figures over the 2000‐2007 period, and employs regression analysis to examine the influence of information asymmetry on the excess component of dividends. The explained variable is specified as excess dividends scaled by total assets. Excess dividends are dividends paid over the mandatory dividend payments calculated with taxable income, instead before‐tax net income. Following the REIT studies of Hardin and Hill and Han, this study employs Tobin Q as the proxy for asymmetric information.Findings – Contrary to Hardin and Hills conclusion, but consistent with dividend signaling theory as well as agency cost explanations, the results indicate that REITs ...

Emerging Market Bonds as an Asset Class: Mean-Variance Spanning

Emerging market bonds improve the efficient frontier of a mixed-asset portfolio. The improvement is based on the application of mean-variance spanning tests on returns that are free from survivorship bias. The results indicate that emerging market bonds span a portfolio comprised of U.S. stocks, U.S. bonds, international equity, and international bonds from developed markets. Mean-variance optimizations suggest that a typical fund sponsor might consider overweighting its allocation towards emerging market bonds.

Time-varying real estate sensitivities of mortgage REITs

This study examines the linkage between mortgage Real Estate Investment Trust (REIT) returns and the private real estate factor. The results show that real estate sensitivities of mortgage REITs are time varying and have been significant since 2000. Furthermore, home-financing mortgage REITs appear to be more sensitive to real estate market fluctuations than commercial-financing mortgage REITs are. This differential sensitivity is consistent with the notion that the default risk and the prepayment risk associated with residential mortgage loans are more closely related to real estate market conditions than are commercial mortgage loans.

Structural Breaks and Cross-Continental Real Estate Securities Diversification: Evidence From Spanning Tests

Abstract This study uses mean-variance spanning tests to examine the role of Asian and European real estate securities in real estate-only portfolios from a U.S. investor’s perspective. The results show that including overseas real estate securities helps enhance the meanvariance efficient frontier only when the portfolio does not include direct real estate assets. Furthermore, the diversification benefit of investing in Asian real estate stocks appears only in the vintage REIT era; it disappears in the new REIT era and after the Asian financial crisis. Moreover, after stripped out the equity market influence from international real estate stocks, the results indicate that trading noise in the equity markets could cause real estate stocks to deviate from their real estate fundamentals and thus reduce the diversification benefits to U.S. real estate investors.