THE FINANCIAL COST OF NON-PARTICIPATION IN SREIT RIGHTS ISSUES AND FACTORS TO BE CONSIDERED

Abstract

This paper aims to investigate the financial cost associated with non-participation in SREIT right issues. Investors were assumed to have the same initial investment, and the internal rate of return between non-participating and participating shareholders were compared over a 5-year investment holding period which spanned from 2008Q1 to 2012Q4. The average spread between their returns was found to be 4.86%. The financial cost associated with non-participation has been postulated to be related to two variables, that being the degree of discount made to the value of rights, and the inability of non-participating shareholders to capitalize on future growth with additional shares. Observed spread was likely to be unique to the time frame studied, as most right issues were offered during the global financial crisis.

Thereafter, since non-participation could stem from uncertainty about a firm’s potential growth, a multiple regression analysis was conducted to explore the relationship between SREIT total returns and macroeconomic and firm specific variables across different economic conditions. The study period spanned from 2008Q1 to 2014Q4 and was broken into two sub-periods: (1) Global Financial Crisis Period and (2) Post-Global Financial Crisis Period. Market returns and long term interest rates were found to have strong associations with returns, and no signs of decoupling from the general stock market found. Empirical results related to firm specific characteristics were less conclusive, with the price-to-book ratio and debt-to-equity ratio displaying the most consistency. Geographically diversified SREITs were found to be more closely interlinked to macroeconomic factors than their counterparts.