THE PRICING OF REAL-ESTATE INVESTMENT TRUST INITIAL PUBLIC OFFERINGS

This paper examines the pricing of Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs). Unlike standard corporations, e vidence suggests that REIT IPOs are correctly priced in the initial ma rket. Significant negative initial-day return for mortgage REITs is fo und to be a function of using the bid price to calculate returns for t hose securities, which trade initially over the counter (OTC). If the bid-ask average or the ask price is used in calculating returns, any a pparent overpricing disappears. Additionally, we find that once transa ctions costs are considered, an investor is better off purchasing a RE IT on the offering.