Value Creation in REIT Property Sell-Offs

We examine major sales of real property by public U.S. Real Estate Investment Trusts (REITs) 1992–2002. We find that abnormal shareholder returns are significantly positive, a result that is consistent with findings for conventional firms that sell off real estate. Because REITs do not pay taxes, this finding supports the view that abnormal returns in real estate sell-offs by all types of firms are derived largely from asset allocation efficiencies and do not result exclusively from tax benefits. Shareholder returns are lower in sell-offs motivated by a desire to reduce long-term debt, as is consistent with financial theory regarding the information content of leverage decisions. Returns are inversely related to the firm's operating performance prior to the sell-off announcement, further supporting the case that improved asset efficiencies create value in real estate sell-offs.     

The persistence of abnormal returns at industry and firm levels: Evidence from Spain

We apply structural equation models to longitudinal data on profits of firms within industries to study the persistence of abnormal returns. We obtain a two‐way variance decomposition for abnormal returns: at firm vs. industry levels, and at permanent vs. transitory components. This decomposition enables us to assess the relative importance of the fundamental components of abnormal returns discussed in the literature. The method is applied to a panel of 5,000 Spanish firms observed over the period 1995–2000. We conclude that: (a) there are significant and permanent differences between profit rates at both industry and firm levels; (b) variation of abnormal returns at firm level is greater than at industry level; and (c) firm and industry levels do not differ significantly regarding rates of convergence of abnormal returns. Copyright © 2007 John Wiley & Sons, Ltd.     

CPF stocks: Prices,returns and volatility

We identify a unique phenomenon in the Central Provident Fund (CPF) stocks where stock prices increase in the absence of fundamental changes in firm value. CPF stocks are stocks endorsed by the Central Provident Fund Board in Singapore as approved investment for its members. CPF stocks offer significant price appreciation and value preservation as well as abnormal returns in the bull market before the October 1987 market crash. We find evidence of noise trading in bull markets and price pressure effects that persist through bearish market conditions.The authors are from the Department of Finance and Banking, National University of Singapore.     

A Measure of Fundamental Volatility in the Commercial Property Market

The low level of volatility observed in appraisal-based commercial property indices relative to other asset classes has been frequently noted and extensively commented on in the real estate finance literature. However, the volatility of such commercial property indices is only one source of information on the second moment of commercial property returns. The volatility of securitized property returns forms another potential source of information, though there is some uncertainty about how closely the volatility of securitized returns may match the volatility of the underlying asset. Each measure of volatility has a potential source of noise associated with it. This paper proposes a fundamental measure of volatility for the commercial property market by using a stochastic volatility model to filter out the signal in the different sources of volatility information. This allows for different measures of volatility to be decomposed into transitory noise and unobserved fundamental volatility. The suitability of such an approach and the properties of the underlying fundamental volatility series are analyzed using data from the U.K. property market.     

On the role of acquisition premium in acquisition research

Several studies argue that paying high acquisition premia is value destroying for acquirer shareholders. There are studies that have even used the size of premium as a measure of low‐quality decision making. This paper departs from the earlier research and shows that acquisition premia may be justified when target firms' resources are difficult for the market to value. An analysis of a sample of 458 acquisitions demonstrates that although higher premia are paid for R&D‐related assets, the premia do not cause negative abnormal returns. Abnormal returns are more strongly affected by the overall target price levels independent of premia. Copyright © 2007 John Wiley & Sons, Ltd.     

When do acquirers earn abnormal returns?

In this study, we explore the conditions under which acquirers earn abnormal returns. We provide an empirical test of Barney and Chatterjee's arguments by examining the role of the respective resource contribution of the target and the acquirer. Combining an event study with a survey of postacquisition resource transfer on a sample of 101 horizontal acquisitions, we find that acquirers do not earn abnormal returns when they only receive resources from the target. In this case, it is likely that multiple bidders, which could have equally captured these resources, competed away all the abnormal returns from the successful bidder. In contrast, we find that acquirers can expect to earn abnormal returns when they transfer their own resources to the target. Overall, we find that value creation does not ensure value capture for the acquirer. Copyright © 2002 John Wiley & Sons, Ltd.     

The Motivation for Institutional Real Estate Sales and Implications for Asset Class Returns

Since real estate assets are sold infrequently, analyses that use samples of exclusively sold properties to estimate pricing models may be seriously in error. This paper uses data on samples of sold and unsold properties and an appropriate statistical methodology to evaluate the extent of this bias. The results clearly show that it is important to control for sales motivations and that pricing equations that ignore this source of bias may be misleading.     

Assessing the Performance of Real Estate Auctions

This article investigates the performance of real estate auctions relative to negotiated sales. It uses a repeat-sales methodology to control for unobserved differences in the quality of auction properties. Properties auctioned in Los Angeles during the 1980s boom sold at an estimated discount of 0%–9%, while sales in Dallas following the oil bust obtained discounts of 9%–21%. This evidence is consistent with the theoretical prediction that the auction discount increases in downturns when a seller trades-off a longer expected selling time in a search market against an immediate auction sale. The study finds no evidence of the declining price anomaly.     

The Impact of Industrial Design Effectiveness on Corporate Financial Performance*

Despite the growing recognition of industrial design's value in creating sustainable competitive advantage, few studies have attempted to quantify the contribution that design makes to company financial performance. This article examines the relationship between industrial design and company financial performance in order to assess industrial design's contribution to this performance. Effective industrial design was evaluated by asking a panel of 138 industrial design experts to rank the industrial design effectiveness of publicly traded firms within nine selected manufacturing industries; the ranking process yielded 93 firms. Based on the rankings, firms within each industry were divided into two groups: those judged as exhibiting high design effectiveness versus those judged as low in design effectiveness. Audited financial data reported to the SEC across a seven‐year period from 1995 to 2001 were used to evaluate financial performance. Using traditional financial ratios senior managers consider essential performance measures, those firms with high design effectiveness were hypothesized to have higher returns on sales, returns on assets, and growth rates of sales, net income, and cash flow than firms with low design effectiveness. High design effectiveness firms further were hypothesized to have higher stock market returns. These comprehensive, corporate financial measures incorporate expenditures made on industrial design (industrial designers' salaries, design consultants' fees, computer‐aided industrial design equipment) and expenditures that designers influence through their design choices (material costs, manufacturing equipment). This analysis reveals that firms rated as having “good” design were stronger on all measures except growth rate measures. These results provide strong evidence that good industrial design is related to corporate financial performance and stock market performance even after considering expenditures on industrial design. Further, the patterns of financial performance over the seven‐year horizon suggest that these effects are persistent.     

Semivariance of Property Value Estimates as a Determinant of Default Risk

Standard practice in the residential mortgage underwriting industry is to estimate collateral values via independent appraisals conducted by third parties. This paper empirically examines the role of property value ( i.e. , appraisal) uncertainty as a determinant of default on residential mortgage loans. Based upon an analysis of 1,428 residential loans drawn from the portfolio of a national mortgage lender, we find evidence that semivariance in property value uncertainty is related to default risk. Specifically, subject properties that are valued above the sales price of recently sold "similar and proximate" properties show evidence of greater default risk. Interestingly, a variance (range) measure of property value uncertainty is not significantly related to default risk.     

The Accuracy of Owner-Provided House Values: The 1978–1991 American Housing Survey

The American Housing Survey (AHS) includes the owner's valuation of the house as a measure of the house's value. If owner-stated values are accurate, the AHS (as well as other survey instruments) can be used by researchers studying a variety of topics. In this study we use the metropolitan version of the AHS for three cities over fourteen years to compare owners' valuations with sales prices of houses that sold in the twelve months prior to an interview. We find that, on average, recent buyers report house values that are 8.4% higher than the stated sales prices. Further analysis indicates that these recent buyers, when compared with owners with longer tenure, overvalue their houses by 3.3%, on average. Thus, we find that the average owner overvalues his house by 5.1%. Also, differences between sales prices and owners' valuations are not related to particular characteristics of the house, occupants (other than length of tenure), or neighborhood. Thus, the use of the owners' valuations will result in accurate estimates of house price indexes and will provide reliable estimates of the prices of house and neighborhood characteristics.     

Consolidating distribution centers can reduce lost sales

In many industries, products are sold out of inventory. When inventory shortages are possible, expected product sales will fall short of expected product demand. We find that this shortfall is proportional to the standard deviation of demand. As we show, this implies that consolidating retailer units – which leads to a lower standard deviation for the aggregate demand – can increase sales.     

Repeat‐Sales Indexes: Estimation without Assuming that Errors in Asset Returns Are Independently Distributed

This article proposes an alternative specification for the second stage of the Case‐Shiller repeat‐sales method. This specification is based on serial correlation in the deviations from the mean one‐period returns on the underlying individual assets, whereas the original Case‐Shiller method assumes that the deviations from mean returns by the underlying individual assets are i.i.d. The methodology proposed in this article is easy to implement and provides more accurate estimates of the standard errors of returns under serial correlation. The repeat‐sales methodology is generally used to construct an index of prices or returns for unique, infrequently traded assets such as houses, art and musical instruments, which are likely to be prone to exhibit serial correlation in returns. We demonstrate our methodology on a data set of art prices and on a data set of real estate prices from the city of Amsterdam.     

The Long-Run Performance of REIT Stock Repurchases

This study investigates the long-horizon performance of open-market stock repurchases for real estate investment trusts (REITs). We develop a new methodology to model the autocorrelation of monthly returns into long-horizon buy-and-hold abnormal return estimators. Serial correlation can introduce bias (autocorrelation bias) because the bid-ask bounce may affect monthly returns for sample firms and non-sample firms in a different fashion. Previous long-horizon event studies have overlooked this source of bias. There is compelling evidence that the market underreacts to the stock repurchase announcements. The evidence holds for different measures of the variance and the effects of cross-correlation of abnormal returns. Results are also robust to the traditional buy-and-hold abnormal return and the wealth relative estimators. We investigate the nature of the underreaction and find strong support for the undervaluation hypothesis.     

Illiquidity and Pricing Biases in the Real Estate Market

This article addresses the micro-analytic foundations of illiquidity and price dynamics in the real estate market by integrating modern portfolio theory with models describing the real estate transaction process. Based on the notion that real estate is a heterogeneous good that is traded in decentralized markets and that transactions in these markets are often characterized by costly searches, we argue that the most important aspects defining real estate illiquidity in both residential and commercial markets are the time required for sale and the uncertainty of the marketing period. These aspects provide two sources of bias in the commonly adopted methods of real estate valuation, which are based solely on the prices of sold properties and implicitly assume immediate execution. We demonstrate that estimated returns must be biased upward and risks downward. These biases can be significant, especially when the marketing period is highly uncertain relative to the holding period. We also find that real estate risk is closely related to investors' time horizons, specifically that real estate risk decreases when the holding period increases. These results are consistent with the conventional wisdom that real estate is more favorable to long-term investors than to short-term investors. They also provide a theoretical foundation for the recent econometric literature, which finds evidence of smoothing of real estate returns. Our findings help explain the apparent risk-premium puzzle in real estate—that is, that ex post returns appear too high, given their apparent low volatility—and can lead to the formal derivation of adjustments that can define real estate's proper role in the mixed-asset portfolio.     

Short Sales and Price Discovery in the Hong Kong Real Estate Market

Indirect real estate (IRE) returns are often shown to lead direct real estate (DRE) returns. Apart from differences in liquidity, transaction costs, and management skills, the DRE market is also less complete than the IRE market—when negative shocks arrive, one can only short IRE (e.g., real estate stocks or REITs), but not DRE. This study investigates if short sales in the IRE market convey any information to the DRE market. Based on high‐frequency (weekly) property price data in Hong Kong from 2000 to 2012, we find that short sales in the IRE market led DRE returns, even after controlling for the lagged IRE returns in a VAR model. This supports an information spillover mechanism in which the DRE market learns private information that is not reflected in IRE returns. The spillover effect, however, weakened after the recent global financial crisis because the increased uncertainty over the credibility of individual firms made short sales more reflective of firm‐specific information than real estate market fundamentals.     

Hedonic Amenity Valuation and Housing Renovations

Hedonic and repeat sales estimators are commonly used to value such important urban amenities as schools, environmental quality and access to transit. Given that property data often omits information on quality differences between same‐aged homes as well as changes in structural attributes over time, researchers must assume that property renovations are uncorrelated with neighborhood amenities. We formally test if this assumption is valid by incorporating detailed data on renovations in Charlotte, North Carolina. We begin by testing how the inclusion of minor and major home improvements influences hedonic and repeat sales indices. Results find limited bias in hedonic indices and that renovated properties are no more likely to be sold than nonrenovated properties. Using the introduction of Charlotte's light rail‐transit system in 2000, we estimate a positive bias of between 1.6% and 19.9% on the capitalized benefits of access to light rail due to omitted information on renovations. Our results show that a number of common data cleaning techniques used to address missing information on structural improvements may worsen this bias.     

Patent characteristics and the age-value relationship: study of OceanTomo auctioned US singleton patents for the period 2006–2008

The article characterizes high and low value patents based on the non-linearity of the age-value relationship, as an attempt to provide some statistical understanding on the difference in the value of patent characteristics over time. A set of 138 US singleton patents, mainly from the computers and communication field, successfully auctioned by an US auction firm called OceanTomo during 2006–2008 forms the data. Analysis shows evidence of non-linearity in the patent age-value relationship and the sensitivity of patent characteristics to temporal dimension in explaining value of patented knowledge. The U-shaped temporal value of knowledge, identifying older patented knowledge as more valuable, thus, finds support. Furthermore, patents sold in their first half exhibit more lag, less patent scope and less forward citations. Patents sold by firms dominate the younger patent, while the older patent cohort finds more patents sold by individuals. These and other results are discussed for their significance for patent sale. We acknowledge the limitations of a small sample size. Nevertheless, the article provides statistical understanding on the potential characteristics of high and low value patents, explored through the non-linear age value dynamics.     

In the Eye of the Beholder? The Effect of Product Appearance on Shareholder Value

In times of convergence with regard to product functionality and performance, the appearance of a product constitutes an important source of competitive advantage. Astonishingly, only a few studies have empirically examined the relationship between design‐related aspects and firm value. Moreover, existing studies predominantly use accounting‐based and/or subjective performance measures. Against this background, the present work assesses the contribution of the three most important product design dimensions (i.e., aesthetic, ergonomic, and symbolic value) to the creation of firm value in the context of the automotive and consumer electronics industry. To do so, we examine stock market reactions to the unveiling of a new product's appearance to the public using event study methodology. In particular, we combine perceptual data at the consumer level with stock market data to examine how target consumers' perceptions of the aforementioned design dimensions are related to abnormal returns following the unveiling of a new product. Results reveal that ergonomic value is positively related to abnormal returns, while aesthetic value only exerts a significant positive effect on abnormal returns if the product also exhibits a certain degree of functional product advantage. Finally, symbolic value exerts a negative influence on stock market reactions. These findings have important implications for the allocation of design‐related investments to aesthetic, ergonomic, and symbolic design features.     

Inferring an Investment Return Series for Real Estate from Observations on Sales

Accurate measurement of the returns to real estate investment are essential to sound analysis. This paper improves upon the traditionally employed method—collecting comparable sales data. A dynamic model of real estate appraisal is developed in which agents have incomplete information, heterogeneous search costs, and varying expectations. Various types of simulation analysis of the model indicate it performs best in the sense that the return estimate converges to the true value faster than other simpler rules.