An Examination of the Small-Firm Effect within the REIT Industry

Real estate investment trusts (REITs) offer investors the ability to more easily include real estate-related assets in their investment portfolios. Certain REIT characteristics may allow some REITs to outperform others. Empirical research in the financial literature indicates that small firms earn higher average rates of return than large firms after accounting for risk. This research tests for the existence of the small-firm effect within the REIT industry. REITs provide an opportunity to examine the small-firm effect and its possible explanations using a relative homogeneous group of securities. The evidence supports a small-firm effect for REITs over the time period examined even after considering the possible explanations identified in the financial efficient markets literature.