Asset specificity and vertical integration in franchising

This study empirically tests transaction cost hypotheses with the use of data on publicly-owned franchised firms. We employ measures of the proportion of company-owned outlets for the degree of integration and brand name capital for the degree of asset specificity. The results suggest that for the sampled firms the degree of asset specificity is positively related to the degree of vertical integration. Additionly, increases in the real interest rate and firm growth rates are found to be positively related with vertical integration, while increases in unanticipated growth and firm experience are negatively related with vertical integration.     

Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty

This article theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.     

Real Estate and Economies of Scale: The Case of REITs

Building on past research in the economies-of-scale debate, we test for scale economies in real estate investment trusts (REITs) by examining growth prospects, revenue and expense measures, profitability ratios, systematic risk and capital costs. Overall, we find that large REITs are increasing growth prospects while succeeding at lowering costs, leading to a direct relationship between firm profitability and firm size. Additionally, we find an inverse relationship between equity betas and firm size, and for all cost of capital measures we find significant scale economies. Further evidence from the stochastic frontier analysis suggests efficiency opportunities appear possible through continued growth and consolidation in REITs.     

Captive Financing Arrangements and Information Asymmetry: The Case of REITs

For the sample period of 1985 and 1986, captive real estate investments trusts (REITs) have a larger bid-ask spread than noncaptive REITs, after controlling for trading volume, price volatility, insider holdings, institutional holdings and firm size. Based on the bid-ask spread literature, the results suggest that captive firms are subject to a greater degree of information asymmetry. This implies a higher cost of capital for captive firms. The evidence here and the trend toward self-administered REITs imply that information asymmetry and conflicts of interests within REITs are priced.     

Debt Capacity of Real Estate Collateral

We study whether real estate assets have a greater positive influence on firm leverage than other tangible assets. Using a large sample of COMPUSTAT firms, we find a significant positive relation between tangibility and leverage in general, and the relation is strongest for real estate collateral. Furthermore, we find that the relation holds only for credit‐constrained firms, i.e., those likely to highly value the additional borrowing capacity of real estate. Our results imply that knowing the composition of a firm's tangible assets is important in understanding its leverage. Our findings could help explain why real estate investment trusts are relatively highly leveraged, even though debt offers them no tax benefit.     

Optimal Size in the Waste Collection Sector

The purpose of this study is to analyze the cost structure of a sample of Italian wastecollection firms in order to assess economies of scale and density and, therefore, definethe optimal size of the firms. A total and a variable translog cost function were estimated using panel data for a sample of 30 firms operating at the provincial level over the period 1991–1995.The empirical evidence suggests that franchised monopoly, rather than side-by-sidecompetition, is the most efficient form of production organization in the waste collection industry. Further, the majority of firms are not operating at optimal scale.     

The Bootstrap Efficient Frontier for Mixed-Asset Portfolios

How much in real estate? To answer this question, uncertainty needs to be introduced into the efficient frontier, so that a confidence interval can be estimated for the real estate weight in a mixed-asset portfolio. Instead of focusing on a single optimal portfolio, this study examines the entire efficient frontier using the traditional point estimate method and the bootstrap simulation. The bootstrap distributions of the estimated weight vectors indicate that their confidence intervals are large enough to render them effectively useless. Once uncertainty is introduced, the efficient frontier becomes fuzzy and the weight vectors become even fuzzier.     

What Does the Stock Market Tell Us About Real Estate Returns?

This paper analyzes the risks and returns of different types of real estate-related firms traded on the New York and American stock exchanges (NYSE and AMEX). We examine the relation between real estate stock portfolio returns and returns on a standard appraisal-based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal-based index after controlling for persistence in the appraisal series. The stock market reflects information about real estate markets that is later imbedded in infrequent property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon rental cash flows from existing buildings. These findings highlight the heterogeneity of securitized real estate-related firms.     

The Characteristics of Takeover Target Firms: The Case of the English Brewing Industry, 1945–1960

The paper examines if takeovers target the “correct” firms. Using the English brewing industry (1945–1960) as a case study, size and conventional performance criteria of taken-over, independent and merging firms are assessed, and shown not to be valid target indicators. Comparison of a real estate/property utilization parameter – average asset value per “tied house” – for each firm category, shows that taken-over firms have the lowest average asset value per tied house. Low average asset value per house characterizes firms which, by failing to optimize their property assets, are poor performers. Takeover therefore, in this case, targets the “correct” firms.     

Global Financial Integration and Real Estate Security Returns

Have globalization and increasing economic and financial integration affected the rates of return of publicly traded real estate companies around the world? Using a set of multifactor models for annual data for 946 firms from 16 countries over the sample period, 1995–2002, we estimate the impact of a country's economic openness on returns of publicly traded real estate firms, controlling for the effects of global capital markets, domestic macroeconomic conditions and firm‐specific variables. We find that a country's real estate security excess (risk‐adjusted) returns are negatively related to its openness. The results are robust across different multifactor model specifications and are a testament to increasing global financial integration and its interplay with the real estate sector.     

Corporate Governance and Performance: The REIT Effect

Real estate investment trusts (REITs) offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces agency problems. We exploit a unique and leading corporate governance database to test whether corporate governance matters for the performance of U.S. REITs. We document for a sample including governance ratings of more than 220 REITs that firm value is significantly related to firm-level governance for REITs with low payout ratios only. Repeating the analysis with the complete database that includes more than 5,000 companies and a control sample of firms with high corporate real estate ratios, we find a strong and significantly positive relation between our governance index and several performance variables, indicating that the partial lack of a relation between governance and performance in the real estate sector might be explained by a REIT effect.     

Economies of Scope and Density in the Market for Real Estate Brokerage Services

Using a multiproduct translog cost function, this paper examines the case for economies of scope and density in the market for residential real estate brokerage services. Earlier research that treated output as a homogeneous commodity reported modest economies of scale for this industry. The results of this study suggest that the composition of output is an important source of these scale economies, rather than simply the size of the firm. The economies of scope which we find imply that a balanced mix of listing and sales is the least costly type of operation, a result borne out by the product mix found in our sample. The results also show product-specific diseconomies of scale, suggesting that specialization in either listing or sales may be sub-optimal under the current institutional arrangements present in the market. Finally, market density appears to be, at best, only a nominal source of savings for real estate brokerage firms.     

Are Losers Picked? An Empirical Analysis of Capacity Divestment and Production Reallocation in the Japanese Cement Industry

As demand in an industry shrinks, pressure for the reduction of capacity arises. A key issue is whether plants which, from an efficiency perspective, should reduce output in fact do so. Focusing on the Japanese cement industry, we examine whether less efficient plants reduce capacity. We find that less efficient firms are not more likely to reduce capacity than more efficient firms; however, less efficient plants within a multi‐plant firm are more likely to reduce capacity than more efficient plants. In addition, we find that this divestment pattern has led to a substantial drop in industry‐wide allocative efficiency.     

Geographic diversification in real estate investment trusts

Whether geographic diversification within property portfolios is ideal remains an open question, with most studies finding either a diversification discount or no evidence of benefits. Using a sample of equity real estate investment trusts (REITs) from 2010 to 2016, we find a nonlinear relation between geographic diversification and firm value. Specifically, geographic diversification is associated with higher REIT values for firms that can be described as being more transparent (i.e., they have high levels of institutional ownership or invest in core property types). Whereas, geographic concentration is associated with higher REIT values for firms that can be described as being less transparent (i.e., they have low levels of institutional ownership or invest in noncore property types). Operating efficiency, at both the property‐ and firm‐levels, are the means by which the diversification value is realized. Operations improve as property portfolios become more geographically diversified for more transparent firms. When the improvements are decomposed into revenue generation and expense efficiency portions, we find revenue generation to be the main operational channel through which the benefits are obtained.     

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.     

Resource Combination and Security Price Reactions: The Case of Real Estate Joint Ventures

Joint ventures are a commonplace occurrence in the U.S. economy. In particular, firms undertaking real estate projects frequently use the joint venture as a method of combining resources. This paper examines security price reactions around real estate joint venture announcements. The evidence indicates that significant increases in the values of the participating firms occur within a two-day announcement period. The changes in values appear to be due principally to the amount of information about the local real estate market possessed by the participating firms, and an information signal about the potential financial viability of the proposed project conveyed by the presence of anchor tenants. While the results are important in their own right, they are also significant in another respect. They seem to confirm the efficiency with which the capital market processes information about the markets for trading real estate claims.     

Product Innovation and Survival in a High-Tech Industry

We investigate the relationship between product innovation and firm survival for a sample of 121 firms in a high-tech industry. We find that location near the technological frontier is an important determinant of firm survival. Firms that are located near the frontier are also more likely to be acquired than to exit by liquidation if they cannot survive as free-standing enterprises. This suggests that product location in the technology space acts as a signal of firm quality. Greater R&D efforts increase the probability of surviving; in the event that the firm does exit, however, its R&D efforts do not significantly influence whether it exits via acquisition or exits via liquidation.     

Explaining the Variation in REIT Capital Structure: The Role of Asset Liquidation Value

We test the Shleifer-Vishny hypothesis that asset liquidation values influence both firm leverage and the choice of debt maturity. Using panel data on real estate investment trusts, we estimate a simultaneous equation model and find that firms specializing in the most (least) liquid assets use more (less) leverage and longer (shorter) maturities. The evidence also suggests that, for REITs, debt maturity and leverage are substitutes, consistent with the theory and predictions of Barclay, Marx and Smith.     

Cross-shareholdings and competition in a rent-seeking contest

We consider a Tullock rent-seeking contest with two firms and two investors. Each investor owns a majority share in one firm and a silent minority cross-shareholding in the other firm. We measure competition by either firms’ aggregate efforts or rent dissipation. We show that aggregate efforts are smaller in our contest than in the benchmark case without cross-shareholdings. Next, we provide the necessary and sufficient conditions such that equilibrium rent dissipation in our contest is larger than in the benchmark case. Rent dissipation is larger under cross-shareholdings if and only if one firm is much more efficient than the other firm, and the cross-shareholding in the more efficient firm is sufficiently smaller than the cross-shareholding in the less efficient firm.     

Focus, Transparency and Value: The REIT Evidence

We trace the effects of corporate focus by examining the relationships among focus, cash flows and firm value. In contrast to past studies that examine the effects of diversifying across SIC-code-defined industries, we show that diversification, even within a single industry, reduces value. Our evidence, drawn from a panel of real estate investment trusts, indicates that this reduction is not due to poor managerial performance. Project-level cash flows are actually higher for less focused firms. However, these gains are offset by higher management, administrative and interest expenses. Thus, the corporate cash flows available to shareholders are not related to focus. Finally, we provide empirical evidence that links the effect of focus on value to informational asymmetries which cause the equity of diversified firms to be less liquid. We attribute some of the effect of focus on the cost of both debt and equity to informational asymmetries or transparency costs.