The Shareholder Wealth Effects of Real Estate Investment Trusts: Mergers and Acquisitions

This study examines the effect of merger announcements on the market value of the bidding firm\u27s equity in 160 transactions involving Real Estate Investment Trusts (REITs). All transactions from January, 1972, to December, 1995, with adequate data availability were examined. They included 101 transactions in which both bidder and target were REITs, 34 transactions in which the only bidder was a REIT, and 25 transactions in which only the target was a REIT. Differences in income taxation between REIT and non-REIT corporations provide an opportunity to test the hypothesis that tax benefits motivate merger activity. All of the empirical evidence developed in this study are consistent with the tax benefits hypothesis, and two pieces of evidence support it. First, the average excess abnormal return to REIT bidders acquiring REIT targets exceeds that of REIT bidders acquiring non-REIT targets. Second, the historical frequency of merger announcements has a natural explanation in terms of historical tax law changes