IPO Underpricing and Real Estate Investment Trusts: Evidence from Japan

Abstract: This study investigates the pricing of 75 initial public offerings (IPOs) of Japanese real estate investment trusts (J-REITs) during the period 2001-2018. We find that the issues are systematically underpriced with significantly positive initial-day returns. Consistent with underpricing explanations that rely on asymmetric information and valuation uncertainty, we show that the degree of underpricing is negatively related to leverage and varies with the type of property. In addition, our findings suggest that the J-REITs outperform several benchmarks over the 18 months following their IPOs. Contrary to the predictions of signaling theories of underpricing, we show that the initial-day returns are negatively related to the aftermarket performance.