Asset Growth and Stock Performance: Evidence from REITs

In this article, we examine the impact of asset growth rates on the future stock performance of 308 publicly traded real estate investment trusts (REITs). We observe that fast‐growing REITs tend to underperform slow growing REITs. However, we find evidence that the growth effect is significantly less negative for REITs selling at a premium to net asset value. In addition, we observe the asset growth effect only in the subsample of REITs that engages in equity issuance over the next 12 months. The combined evidence suggests contemporaneous equity dilution, which has not been considered in previous studies, may provide an explanation for the underperformance of fast‐growing firms.     

The Antecedents and Consequences of Affordable Value Innovations for Emerging Markets

Emerging markets offer tremendous growth opportunities for firms. While established multinational firms typically focus on premium segments in emerging markets, they often fail to leverage additional growth opportunities in so‐called good enough or low‐income segments in emerging markets. Customers in these low‐income markets have substantially different requirements and are very price sensitive. Theoretical and case‐based research suggests that innovating for these low‐income segments in emerging markets differs significantly from innovating for premium or traditional Western markets. We argue that tapping successfully into low‐income segments in emerging markets requires the development of new products that meet the low price expectations while at the same time offering also value to customers in these segments. We refer to these new products as affordable value innovations. We analyze the antecedents of affordable value innovation for emerging markets. We draw on institutional theory to derive three potentially relevant antecedents of affordable value innovation for emerging markets. These are bricolage, local embeddedness, and standardization. We test our hypotheses using multiple informant data from 47 multinational corporations involving 103 innovation projects that target low‐income customers in emerging markets. Our empirical analysis shows that all three antecedents have significant effects on the level of affordable value innovation: while bricolage and local embeddedness are positively related to the level of affordable value innovation, standardization has a negative impact. We also examine the relationship between the level of affordable value innovation and performance. We find evidence for our basic assumption that a firm's capability to develop and launch affordable value innovations is key to success in emerging markets. It indicates that a firm's investments in affordable value innovations for emerging markets pay off financially. Finally, a cross‐regional comparison of our data shows that the key findings on antecedents of affordable value innovation and its impact on performance do not vary across various emerging markets. Overall, our findings offer important implications for research on and the practice of innovation for low‐income segments in emerging markets.     

Comparing the Earnings of Cohabiting Lesbians,Cohabiting Heterosexual Women,and Married Women: Evidence from the 2000 Census

Using data from the 2000 Census, I tested the hypothesis that cohabiting lesbians have statistically different earnings from cohabiting and married heterosexual women. Cohabiting lesbians earn more than their heterosexual counterparts, even when differences in child‐rearing status are considered. Furthermore, the results do not support differences in household specialization as an explanation for the lesbian earnings premium.     

Lender Steering in Residential Mortgage Markets

In this article, we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan‐to‐value ratios (LTV) above 80%. Our empirical analysis focuses on propensity score‐matched portfolios of piggyback and single‐lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self‐selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.     

Green Buildings in Commercial Mortgage‐Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms

We study the impact of green building on loans in the CMBS market. A hazard model shows green buildings carry 34% less default risk, all else equal. A matched‐sample analysis gives similar results. We attribute the effect to a loan‐to‐value channel, where risk is lowered by a green price premium. The benefit comes at least partly from the level of green achievement, not only the label itself. Loans on buildings that were green at loan origination have slightly better terms than loans on nongreen buildings. That difference is growing over time, but the effect is economically small compared to default risk.     

A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall

This article develops a model and provides a closed‐form formula to uncover the theoretical relationship between real estate price and time on market (TOM). Our model shows a nonlinear positive price‐TOM relationship, and it identifies three economic factors that affect the impact of TOM on sale price. We demonstrate that conventional metrics for real estate return and risk, which are borrowed in a naïve fashion from finance theory, do not account for marketing period risk and tend to overestimate real estate returns and underestimate real estate risks. Our model provides a simple way to correct such bias. This theory helps to explain the apparent “risk‐premium puzzle” in real estate.     

The Economics of Style: Measuring the Price Effect of Neo‐Traditional Architecture in Housing

Vintage effects have received considerable attention from economists in the context of house prices. Although strongly related, the impact of architectural building styles on prices has not been studied yet. Using a cross‐sectional hedonic price analysis including building styles of recently developed homes in the Netherlands we find a significant price premium for housing with neo‐traditional architecture. Extensive intervention by local authorities on the supply side of the housing market seems the most probable explanation of this effect. The decreasing price premium over time reflects the impact of supply restrictions on price, but also indicates that style does matter.     

Some evidence on the gains from international diversification for Canadian investors

It is easily demonstrated ex post that international portfolio diversification results in increased returns and reduced risk. However, to determine the value of international diversification as an effective portfolio management strategy, it is necessary to form portfolios based on information available at the time of their composition, and then evaluate the performance of the portfolio in the following months. This is the main focus of our study, which adds several innovations to past research. First, we use daily rates of return on 23 national indices to evaluate the value of international diversification for a Canadian investor. Second, we evaluate the predictive value of the historical variance-covariance matrix vis-à-vis alternative models. Third, we use the Bayes-Stein correction to reduce errors in the historical return vector. Finally, we use a quadratic programming model in order to introduce the effects of constraints on the optimisation process. The results, obtained over the 1986–1989 period, are not in favour of international diversification. Returns on diversified portfolios were often lower than returns on the low-risk Canada market during the low-performance portfolio test periods. In other cases, higher returns on diversified portfolios could not be justified by their higher volatility. It is possible that these results may be partially due to the effects of the market crash in October 1987. Nevertheless, our study brings up many directions for future research. Is international diversification in fact profitable? Is portfolio optimisation appropriate in an international context? Finally, what is the best way to estimate the expected return vector in various markets?     

Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations

This article examines real estate's role in institutional mixed‐asset portfolios using both private‐ and public‐real estate indices, as a means of examining varying real estate‐related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest—using infinite‐horizon returns and all of the caveats that accompany such a perspective—that real estate allocations of approximately 10–15% of the mixed‐asset portfolio represent an upper bound for most investors. For those investors preferring low‐risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high‐risk portfolios, public real estate (with its embedded leverage of 40–50%) is the vehicle serving this allocation preference—with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate‐risk portfolios, an intermediate‐leverage approach seems optimal.     

Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility‐based Framework

We study the diversification benefits of REIT preferred and common stock using a utility‐based framework in which investors segment based on risk aversion. We examine optimal mean‐variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish three main results. First, REIT common stock helps low risk aversion investors attain portfolios with higher returns, while REIT preferred stock helps high risk aversion investors by providing a venue for risk reduction. Second, REIT preferred stock has a risk‐return profile not easily replicated by other asset classes. Finally, conclusions drawn from the empirical analysis are markedly different under these constraints compared to the classical unconstrained setting.     

The Borrower's Perceived Risk in Mortgage Choice

We investigate how borrowers perceive the risk in the adjustable rate mortgage (ARM) versus fixed rate mortgage (FRM) choice. We develop a mortgage choice model where the coefficient on the long‐term bond risk premium is conditional on the borrower's perceived risk. We show that the perceived risk fluctuates over time according to the short‐term interest rate level and housing market conditions. We find that when the short‐term rate level is high (low), the borrowers perceive low (high) risk of a short‐term rate rise, thus opting for ARMs (FRMs). Also, during a down housing market they become more risk‐averse perceiving higher risk in choosing ARMs. The perceived risk level alters the borrowers’ sensitivity to the long‐term bond risk premium.     

A Test of a Buying Rule for "Underpriced" Apartment Buildings

Apartment-building repeat-sales data are used to test a trading rule. Property values are estimated through regression; if the actual price is less than the estimated value, the property may be "undervalued." Returns are calculated for these "undervalued" properties and adjusted for risk using the Sharpe ratio. A test is done of whether these ratios are significantly different for different portfolios. The "undervalued" properties have higher appreciation returns, but once these are adjusted for risk, the differences in returns are not significant. The paper contributes to the real estate efficiency literature and suggests a workable method for comparing the performance of real estate portfolios on a risk-adjusted basis.     

Technological Diversification, Coherence, and Performance of Firms

Technological diversification at the firm level (i.e., the expansion of a firm's technology base into a wide range of technology fields) is found to be a prevailing phenomenon in all three major industrialized regions,—the United States, Europe, and Japan—prompting the term multitechnology corporation. Whereas previous studies have provided insights into the composition of technology portfolios of multitechnology firms, little is known about the relationship between technological diversification and firms' technological performance. Against a backdrop of the technology and innovation management literature, the present article investigates the relationship between technological diversification and technological performance, taking into account the moderating role of technological coherence in firms' technology portfolios. Hereby, technological coherence is defined as the degree to which technologies in a technology portfolio are technologically related. To measure the technological coherence of portfolios, a measure of technological relatedness of technology fields is constructed based on patent citation patterns found in 450,000 European Patent Office (EPO) patent grants. Two hypotheses are presented here: (1) Technological diversification has an inverted U‐shaped relationship with technological performance; and (2) technological coherence moderates the relationship between technological diversification and technological performance positively. These hypotheses are tested empirically using a panel data set (1995–2003) on patent portfolios pertaining to 184 U.S., European, and Japanese firms. The firms selected are the largest research and development (R&D) actors in five industries: pharmaceuticals and biotechnology; chemicals; engineering and general machinery; information technology (IT) hardware (i.e., computers and communication equipment); and electronics and electrical machinery. Empirical results, obtained by fixed‐effects negative binomial regressions, support both hypotheses in the present article. Technological diversification has an inverted U‐shaped relationship with technological performance. Technological diversification offers opportunities for cross‐fertilization and technology fusion, but high levels of diversification may yield few marginal benefits as firms risk lacking sufficient levels of scale to benefit from wide‐ranging technological diversification, and firms may encounter high levels of coordination and integration costs. Further, the results show that the net benefits of technological diversification are higher in technologically coherent technology portfolios. If firms build up a technologically coherent diversified portfolio, the presence of sufficient levels of scale is ensured and coordination costs are limited. At the same time, technologically coherent diversification puts firms in a better position to benefit form cross‐fertilization between technologies. The present article clearly identifies the important role of technological coherence in technology diversification strategies of firms.     

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.     

Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market.     

Alliance portfolios and firm performance: A study of value creation and appropriation in the U.S. software industry

This study reveals the multifaceted contribution of alliance portfolios to firms' market performance. Extending prior research that has stressed the value‐creation effect of network resources, it uncovers how prominent partners may undermine a firm's capacity to appropriate value from its alliance portfolio. Analysis of a comprehensive panel dataset of 367 software firms and their 20,779 alliances suggests that the contribution of network resources to value creation varies with the complementarity of those resources. Furthermore, the relative bargaining power of partners in the alliance portfolio constrains the firm's appropriation capacity, especially when many of these partners compete in the focal firm's industry. In turn, the firm's market performance improves with the intensity of competition among partners in its alliance portfolio. These findings advance network research by highlighting the trade‐offs that alliance portfolios impose on firms that seek to manage and leverage their alliances. Copyright © 2007 John Wiley & Sons, Ltd.     

Entrepreneurial Orientation and Firm Performance: Drawing Attention to the Senior Team

Prior studies have argued entrepreneurial orientation (EO) plays an important role in explaining firm performance. This study aims to assess how senior team attributes moderate the relationship between EO and firm performance. For this purpose, an attention‐based perspective is adopted, focusing on attention scope as well as distributed and situated attention. By considering the role of senior team heterogeneity in broadening the attention scope of senior teams and the role of senior team shared vision in aligning distributed attention across organizational functions, this research investigates how senior teams may enhance the value‐creating potential of EO. In addition, we assess situated attention by including the notion of environmental dynamism and examining whether the role of the senior team attributes is contingent upon environmental conditions. Using a time‐lagged sample of 346 firms operating in various industries, we find that senior team heterogeneity helps firms to leverage their EO and improve their performance. Moreover, once environmental conditions are taken into account, results indicate that the absence of heterogeneity at senior team level may be particularly detrimental for firms operating in stable environments. The direct moderating effect of shared vision on the relationship between EO and performance is not substantiated. However, senior team shared vision has a positive impact for firms operating in dynamic environments, providing a premium for firms aiming to realize the inherent value of EO. Our research provides important implications for senior teams aiming to leverage their EO into increased firm performance. Evidence shows that while a heterogeneous team composition and senior team shared vision may provide several benefits, these advantages may fluctuate across environmental conditions.     

They Would If They Could: Assessing the Bindingness of the Property Holding Constraints for REITs

This study examines the bindingness of the property holding constraints which Real Estate Investment Trusts (REITs) face on their portfolios (the dealer rule), and illustrates how these constraints hinder REITs from exploiting opportunities to time the property market. I first simulate a set of filter‐based market timing strategies, which outperform a buy‐and‐hold strategy out of sample, and show that imposing a four‐year (or even the newer two‐year) holding constraint significantly reduces the excess returns the strategies generate. I then analyze actual holding periods of properties in REIT portfolios and find that there seems to exist a large degree of demand for short property holding periods and that the trades generated by the filter strategy generally resemble actual REIT trading activity, validating the relevance of the simulation results. A direct test for the constraint reveals that REITs' propensity to hold a property beyond the minimum period increases, the higher the profit from the transaction, consistent with the asymmetric nature in which the rule is enforced. By contrast, this effect is insignificant for Umbrella‐Partnership REITs (UPREITs), which are not as affected by the constraint. I further show that UPREITs overall achieve significantly better ex‐post market timing performance than non‐UPREITs. I thus find that overall REITs are limited by the dealer rule.     

The Effect of Alternative Return Measures on Restricted Mixed-Asset Portfolios

A restricted portfolio is constructed which includes NYSE common stocks, corporate bonds, government bonds, small capitalization common stocks, residential real estate and farmland and returns for each of four different tax brackets (0%, 15%, 30%, 45%). Next, three alternative measures of rates of return for residential real estate and farmland are used. Finally, since some researchers believe that standard risk measures (variance and standard deviation) do not capture the total risk in real estate, the risk for the real estate returns is increased five times while the returns are held constant. The twenty–four optimal portfolios (four tax brackets with two measures of risk and three measure of return for residential real estate and farmland) are then derived. These results are then compared and contrasted to each other to ascertain the change in sensitivity of the optimal portfolios due to different tax rates, different rates–of–return estimates and different risk estimates.     

High-Involvement Management and Pay in Britain

High‐involvement management practices have well‐established benefits for employers, but what do they do for employees? Using a nationally‐representative survey of British private‐sector workplaces, high‐involvement management is shown to be associated with higher pay. The wage premium is little affected by the choice of employee involvement practices (e.g., teams versus quality circles), but it appears only where employee involvement practices are supported by job security guarantees. Powerful trade unions increase the premium.