The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

Posted: 23 May 2012

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate; The Kornblau Institute

Gary A. Patterson

University of South Florida

Multiple version iconThere are 2 versions of this paper

Date Written: Summer 2012

Abstract

This article examines real estate investment trusts (REITs) to determine the correspondence between short interest and subsequent prices. The theoretical basis for our tests comes from the overvaluation conditions created by a combination of costly short selling and heterogeneous beliefs. This article exploits the unique characteristics of REITS as they are similar with respect to high dividend payouts and differentiated by underlying real asset investments. An innovative aspect of the methodology involves partitioning firms based on investment focus as a proxy for transparency and as a determinant of heterogeneous beliefs regarding valuation. The findings (i) affirm the information content of REIT short interest and (ii) highlight the importance of investment focus in resolving the divergence in investor opinions of value. Overvaluation conditions exist among REITs with greater short interest and less transparency, whereas such valuation conditions do not appear among transparent REITs, regardless of the level of short selling.

Suggested Citation

Chen, Honghui and Downs, David H. and Patterson, Gary A., The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs (Summer 2012). Real Estate Economics, Vol. 40, Issue 2, pp. 249-283, 2012, Available at SSRN: https://ssrn.com/abstract=2065137 or http://dx.doi.org/10.1111/j.1540-6229.2011.00312.x

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284-4000
United States

The Kornblau Institute ( email )

Richmond, VA 23284-4000
United States

Gary A. Patterson

University of South Florida ( email )

Tampa, FL 33620
United States

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