Extrapolation Theory and the Pricing of REIT Stocks

Joseph T.L. Ooi (), James R. Webb () and Dingding Zhou ()
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Joseph T.L. Ooi: Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566
James R. Webb: Department of Finance, College of Business, Cleveland State University, Cleveland, Ohio 44115
Dingding Zhou: Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566

Journal of Real Estate Research, 2007, vol. 29, issue 1, pages 27-56

Abstract: This paper is the winner of the best paper on Real Estate Investment Trusts award (sponsored by the National Association of Real Estate Investment Trusts (NAREIT)] presented at the 2005 American Real Estate Society Annual Meeting. This study evaluates the investment prospects of value stocks in the real estate investment trust (REIT) market. Value stocks are defined as those that carry low prices relative to their earnings, dividends, book assets, or other measures of fundamental value. The empirical results show that from 1990 onwards, value REITs provide superior returns without exposing investors to higher risks. The evidence is consistent with the extrapolation theory, which attributes the mispricing to investors over extrapolating past corporate results into the future. Interestingly, the findings reveal that such extrapolation is asymmetric in the REIT market. While value REITs are underpriced in accordance with the extrapolation theory, no evidence is found that growth REITs are overpriced. The value anomaly also exhibited several temporal traits. Firstly, the value premium varies over time. Secondly, the magnitude of the premium is inversely associated with the market performance. Finally, the value anomaly is not evident in the pricing of REITs in the 1980s.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 2007
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