Open AccessInternational Real Estate Review
Author(s) -
Helen X. H. Bao,
Adam Brady,
Ziyou Wang
Publication year - 2020
Publication title -
journal of the asian real estate society
Language(s) - English
Resource type - Journals
ISSN - 1029-6131
DOI - 10.53383/100294
Subject(s) - real estate investment trust , real estate , capitalization rate , financial economics , event study , economics , business , econometrics , monetary economics , finance , geography , context (archaeology) , archaeology
We use the reclassification of the real estate stocks in the S&P 500 from the Financials sector as a natural experiment to test the co-existence of both market force and behavioural biases. By performing event studies on real estate investment trusts (REITs) included in the S&P 400, S&P 500, and S&P 600 indices on both the announcement and implementation dates, we investigate the impact of the reclassification of the real estate stocks in the S&P 500 from the Financials sector to the newly created Real Estate sector under the Global Industry Classification Standard (GICS) system. We set up four hypotheses to test if the identified reclassification effect is due to improved pricing efficiency or bounded rationality. The event studies confirm the presence of abnormal returns during the announcement of the new sector and the S&P implementation. The reclassification effect is the largest for large-cap real estate stocks that are included in the S&P 500 index. These abnormal returns are robust to various measures of statistical significance and variation of event windows. The creation of a real estate category in the GICS improves the pricing efficiency of real estate stocks, but also triggers framing effects among investors. The market is under the influence of both rational and irrational forces.