Do Changes in Industry Classification Systems Matter? Evidence from REITs

The 2016 introduction of a Real Estate sector to the Global Industry Classification Standard (GICS) provides a natural experiment for studying how industry classification systems impact firms. This study uncovers significant abnormal returns of 2.31% and 2.49% for real estate investment trusts (REITs) around two distinct announcements of the classification restructuring. This supports the theory of decreasing asymmetric information occurring with the increase in sector transparency. Cross-sectional regressions show higher abnormal returns for REITs of medium cap size, with lower leverage, and with more institutional ownership (IO). The study also tests for changes in IO levels after the event using 13-F filings. A difference-in-difference estimation reveals a lower count of owners and percent of shares held by IOs in the postreclassification period compared to a matched sample of peer firms. Evidence emerges that refutes the common industry refrain of a rise in REIT IO following the classification restructuring.