The changing asymmetric information component of REIT spreads: A study of anticipated announcements

This study examines the risk-compensating behavior of REIT market makers. T he bid-ask spread is hypothesized to compensate market makers for three cos ts: asymmetric information, order processing, and inventory. As the market maker's perceived likelihood of transacting with a better-informed individu al increases (decreases), the percentage of the spread that is attributed t o asymmetric information will increase (decrease). This study examines the asymmetric information component of the bid-ask spread immediately prior to and following REIT dividend announcements and REIT funds from operations a nnouncements during 1995 and 1996. The asymmetric information component inc reases the day before and then declines subsequent to dividend announcement s of small and equity REITs. Asymmetric information costs increase followin g funds from operations announcements.