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1. Introduction
This study investigates the total direct costs, underwriting costs and non-underwriting direct costs of raising external equity capital by US. Real Estate Investment Trust (REIT) initial public offerings (IPOs) from 1996 until June 2010. REITs, like other firms seeking to list in a stock exchange, are generally initially funded through external equity capital raised by IPOs. IPOs however have substantial total direct costs associated with them, including underwriting fees, legal, accounting, auditing, advertising, printing, listing expenses and, etc. As such, IPO issuers retain only the net proceeds to use in their operations. [24] Dolvin and Pyles (2009) identify that the direct costs are an important consideration for issuers in raising external equity capital. Moreover, REITs, in comparison to other stocks, are relatively transparent ([9] Buttimer et al. , 2005) and hence leave relatively lower money on the table through underpricing. [1] Bairagi and Dimovski (2011) report underpricing of 3.18 percent for REIT IPOs issued during 1996-2010 which is much lower than 39.51 percent underpricing of US industrial IPOs over 1997-2002 ([20] Corwin and Schultz, 2005) and also the cross sectional variation of underwriting fees in REIT IPOs is much more than their industrial counterparts. As REITs have relatively lower indirect costs of underpricing, are comparatively more dependent on initial equity capital for their initial operations and have higher cross sectional variation in underwriting fees, the direct costs of raising their initial equity capital are an important component of their costs of capital and deserve study, particularly the determinants of underwriting fees and non-underwriting direct expenses.
There have been a number of empirical studies covering the total direct costs of raising external equity capital for firms in industries other than REITs ([53] Ritter, 1987; [41] Lee et al. , 1996). Most of the previous studies on US REIT IPOs however covered the indirect costs of initial underpricing until [14] Chen and Lu (2006) discussed the direct cost of underwriting. The non-underwriting direct expenses and their determinants however have not yet been reported in the REIT literature even though some of the non-underwriting direct expenses such as legal and accountants' fees are determined by the issue complexities rather than its size and printing and distribution of the issue documents are related to both issue...