WHY DO REITS MAKE BAD ACQUISITIONS?

Abstract

This paper examines the wealth effects associated with 186 acquisitions events made by 33 Singapore REITs. The market reaction from acquisition announcements were studied to determine if these acquisition strategies utilised by REIT managers were creating value or destroying value for unitholders. Using an event study methodology, S-REITs are found to have generated statistically significant positive abnormal returns of 0.36% over an event window (-10, +10). The research goes on to analyse the sources of negative abnormal returns in acquisitions so that REITs can avoid these pitfalls and make better investment decisions. Based on a multivariate ordinary least squares regression, seasoned equity offerings were found to be the source of negative abnormal returns. Further investigation using a binary logistic regression and multinomial logistic regression showed that S-REITs were 2.46 times and 2.45 times more likely to make a bad acquisition if they utilised new equity to finance the acquisition. Lastly, an Interaction variable between the Market to Book variable and the New Equity variable was introduced into the regression model to better understand the relationship between acquisitions, seasoned equity offerings and equity valuation timing. The findings showed that positive abnormal returns were associated with REITs that concurrently executed acquisitions and appropriately timed their seasoned equity offerings based on their equity valuation.