The Valuation Effects of REIT Mergers During the Covid-19 Pandemic

Abstract

The purpose of this study is to examine the valuation effect of mergers, which in general supports the notion of a synergistic agglomeration. The shock that the Covid-19 pandemic posed upon the real estate industry presented an opportunity for financially stronger REITs to acquire some of the struggling firms using their free cash flows. This study covers the entire year of 2020, starting with when Covid-19 was first acknowledged as a public health emergency until the vaccines were approved. By applying a standard event study method, we assess five different return measures of the bidder, target, and their combined outcomes to test two competing merger motivations based on building empires or creating synergies. Here, we find evidence for the support of the empire-building hypothesis. We also find that cash-cash merger deals were negatively associated with the bidding firm’s returns compared to cash-stock mergers. Thus, contrary to the prevalent finding in the merger literature that mergers are mostly synergistic, our study finds that the Covid-19 pandemic facilitated empire-building mergers. This study is amongst the first to examine REIT mergers during the Covid-19 pandemic.