The Impact of Potential Private Information on REIT Liquidity

This article is the winner of the Real Estate Investment Trusts manuscript prize (sponsored by the National Association of Real Estate Investment Trusts) presented at the 1999 American Real Estate Society Annual Meeting.This article examines how, and to what degree, the potential for private information affects the liquidity of the market for real estate investment trusts (REITs). Consistent with the previous literature, we find that REITs trading on organized specialist exchanges are more liquid than those trading in the over-the-counter market. In addition, an examination of REIT market liquidity across individual firm portfolio holdings reveals REITs with more focused investment strategies are easier to value and more liquid than their diversified counterparts. Finally, our results also indicate liquidity improves as the percentage of the firm's investment portfolio held as direct property (i.e., equity) investments rises. This finding is consistent with the belief that financial assets are informationally opaque and, therefore, uniquely difficult to value.