In this article, we review the capital markets’ response to the bankruptcy of Residential Resources (Res Res), a Real Estate Investment Trust (REIT), less than a year after its initial public offering in 1988.
We find a significant event day value decline for a broad portfolio of REITs. REITs whose portfolios are most similar to Res Res experienced both a significant value decline and an increase in bankruptcy risk on the event day. REITs with dissimilar portfolios experienced neither of these effects.
Among the REITs with similar portfolios to Res Res, leverage ratios explain 84% of the event day value declines. Our findings suggest that ignoring intra-industry firm differences can lead to spurious conclusions.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.