A test of the signaling value of IPO underpricing with REIT IPO-SEO pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firm 's true worth such that good quality firms issue seasoned equity at favorab le prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signal ing link between IPOs and SEOs is critical for REITs. Consistent with the s ignaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricin g results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underprici ng does not mitigate the valuation loss associated with seasoned offerings, however.