Alfred E. Kahn, 1917–2010

Our introduction to this compendium reviews Alfred Kahn’s academic and policy interests, his activities as a regulator and advisor to governments and companies, and the interactions between these aspects of his life as an economist. Although best known for his research on the economics of regulation and his application of microeconomic principles in his role as a regulator and advisor, Kahn’s academic research portfolio was much more diverse. He wrote about patent policy, economic development, antitrust policy, and other topics, in addition to his work on regulation and deregulation. Even before becoming a regulator he was actively involved in applying economic principles to regulatory problems as an advisor and consultant. In all of his work Kahn recognized that markets were imperfect, but that policies aimed at improving market performance often made things worse. His experience as a regulator and consultant strengthened his recognition that the costs of imperfect regulation had to be carefully balanced against the costs of imperfect markets. One had to search for the best that could be done in an imperfect world. Kahn was particularly fascinated by the challenges of designing and implementing policies to govern the transition from regulated monopoly or oligopoly to an industry that would ultimately rely primarily on competitive markets to govern firm behavior and performance. Fred Kahn was an extraordinary man who is missed greatly by his many friends and colleagues representing a wide range of political orientations and approaches to economic and public policy analysis.     

The Performance of Commercial Mortgages

This study examines the return characteristics of a large, well-diversified commercial mortgage portfolio. Mortgage-specific cash-flow histories are constructed for 2,480 loans originated over the period 1974 through 1990, and a contingent-claims approach to pricing risky debt is used to estimate inter-temporal market values. Quarterly holding-period returns are compared across selected mortgage groups and to alternate asset classes. Our findings suggest that both mortgage returns and volatility of return are comparable to those of other forms of fixed-income assets over the study period. Implied property price volatility is found to average 17%, a result significantly higher than reported in earlier studies. While mortgage returns are found to vary by property type and region of origin, cross correlation of returns is found to be high, illustrating the systematic effect of interest rates on the performance of commercial mortgages over the period 1974 through 1990. However, an increase in credit risk in the latter years of the study suggests that diversification may be a worthwhile objective for holders of these assets. We do not find evidence to suggest that abnormal returns were earned on commercial mortgage portfolios over the study period.     

REIT-Based Pure-Play Portfolios: The Case of Property Types

This article explores a technique for constructing REIT-based pure-play portfolios which replicate the performance of target real estate sectors without direct exposure to non-target sectors. The construction of pure-play portfolios uses a combination of long and short positions, and does not require time-series data for the target sectors. Pure-play portfolios may be useful for hedging, speculation, building custom-designed balanced portfolios, calculating betas for capital budgeting and developing historical performance indices. Performance indices for the four major commercial property-type sectors are presented in this paper. REIT-based sectoral returns are then compared with NCREIF-based returns by property type.     

Do telecom carrier takeovers create value? Longitudinal analysis of U.S. telecom carrier takeovers from 1996 to 2005

Takeovers by telecommunications carriers have surged during between 1996 and 2005, stimulated by the Telecommunications Act of 1996. In this study, we hypothesize and test the short-term and long-term performance of telecommunications carrier mergers and acquisitions (M&As) between 1996 and 2005 according to three main categories (strategic types, bidder characteristics, and payment methods). For short-term performance, this study investigates abnormal market returns of bidding firms after M&A announcements and our study shows that telecommunications carrier M&A announcements do result in a significant increase in shareholder wealth in the short run. However, from a long-term perspective, which has been investigated in terms of the survival rate and the operating performance after M&As, the telcos experience a statistically significant decrease of up to 10%. The results also show that though strategic type, bidder characteristics, and payment method play an important role in the value creation of M&As in the short term, only the bidder size matters in the success of M&As over a long period of time.     

What Factors Determine International Real Estate Security Returns?

We use constrained cross-sectional regressions to disentangle the effects of various factors on international real estate security returns. Besides a common factor, pure country, property type, size and value/growth factors are considered. The value/growth measure that is used in this paper provides for each security the relative importance of the value and growth components, rather than a binary classification. The value/growth factor is found to be volatile and to have a substantial effect on returns over the period February 1990–April 2003. Country factors are the dominant factors, and size is shown to have a negative impact on returns. Statistical factors derived by means of cluster analysis explain about one third of specific returns on international real estate securities. The implication for portfolio managers is that failing to recognize the importance of the various factors leads to the portfolio being exposed to systematic risk.     

Geographic Portfolio Allocations,Property Selection and Performance Attribution in Public and Private Real Estate Markets

This article examines the effects of geographic portfolio concentrations on the return performance of U.S. public real estate investment trusts versus private commercial real estate over the 1996–2013 time period. Adjusting private market returns for differences in geographic concentrations with public markets, we find that core private market performance falls. Using return performance attribution analysis, we find that the geographic allocation effect constitutes only a small portion of the total return difference between listed and private market returns, whereas individual property selection within geographic locations explains, in part, the documented outperformance of listed versus private real estate market returns.     

Real Estate Returns by Strategy: Have Value‐Added and Opportunistic Funds Pulled Their Weight?

Real estate strategies broadly fall into three categories: core, value‐added and opportunistic. This empirical examination of net returns from these three strategies indicates that, on a risk‐adjusted basis, the value‐added funds have strongly underperformed and the returns from opportunistic funds have weakly underperformed the returns available from core funds. In so concluding, this article departs from standard asset‐pricing models in two important respects: the total risk is used and the cost of borrowing increases as leverage increases. While the first departure has no substantive effect, the second departure lowers the estimate of the underperformance of noncore funds.     

Uncertainty premia in REIT returns

We provide a systematic study of how financial and real estate uncertainty affect the aggregate return performance of the U.S. REIT market from 1994 to 2017. A temporal causality analysis reveals a negative uncertainty impact on REIT returns. The asset pricing analysis confirms the predictive relation and suggests that REITs are statistically significantly exposed to changes in market-wide uncertainty, for which investors require a return compensation. We also identify economic state variables to explain time-varying uncertainty exposures as well as periodic hedging characteristics of REITs. Finally, we find evidence that the source of uncertainty matters for compensating expected REIT returns.     

Absorptive Capacity and Source‐Recipient Complementarity in Designing New Products: An Empirically Derived Framework*

Numerous publications are dedicated to absorptive capacity and new product development (NPD). Most are centered on the recipient team, and very few consider the effects of the source team knowledge characteristics on the knowledge absorption and the NPD performance. This paper analyzes the type of the external knowledge sourced from outside the organization and the process through which it is used by the recipient firm and the effect on NPD performance. This is done through a specific type of source team knowledge, the design, and through the NPD process in industries (clothing and construction) where it plays a key role. NPD cases were analyzed and clustered in three categories of design absorption processes. From these categories, a conceptual framework of the source‐recipient knowledge complementarity and its impact on the NPD performance is proposed. The main result is that the complementarity between the recipient and the source knowledge is a critical aspect of the absorption process and therefore of the NPD performance. From a managerial perspective, this research highlights the role of design in the NPD process and how the combination of design knowledge with prior knowledge (marketing or technological) is related to NPD performance.     

Public Real Estate Limited Partnership Returns: A Preliminary Comparison with Other Investments

Real Estate Limited Partnership (RELP) securities have attracted substantial investor interest, but limited research study. This paper, utilizing a very recent database of actual RELP secondary market transactions, provides preliminary evidence regarding the relative performance of RELP securities, as well as the interrelationships between RELP returns and the returns of Treasury bills and bonds and common stock. Results suggest that RELP returns are negatively correlated with common stock returns, but are positively correlated with the rate of inflation. RELP returns do not consistently exceed the rate of inflation nor do they exceed common stock returns. RELP returns also failed to outperform a broadly-based income property index.     

Institutional Portfolios: Diversification through Farmland Investment

This article demonstrates that farmland can enhance the overall performance of institutional portfolios which are currently dominated by stocks, bonds, and business real estate. Unlike previous articles on farmland returns, this article addresses the issue of "smoothing bias" associated with appraisal-based farmland returns. Improved measures of income returns to farmland are also used in developing the estimates of optimal portfolios. Parametric testing revealed that farmland continues to enter the optimal portfolios even for large increases in the variance or for large reductions in the annual returns to farmland.     

Teachers’ Unions,Compensation, and Tenure

In this paper I show that school districts in which teachers negotiate via collective bargaining have greater returns to experience and grant tenure earlier than districts without collective bargaining. Districts that are unionized, either with or without legal collective bargaining protections, have higher returns to degrees and higher starting salaries than districts without a union. Unionization is not strongly correlated with the existence of output‐based pay for performance but is correlated with the use of output‐based measures in tenure decisions. Unionization is positively correlated with the number of junior teachers dismissed for poor performance but not strongly correlated with the number of senior teachers dismissed for poor performance.     

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.     

Institutional Capital Flows and Return Dynamics in Private Commercial Real Estate Markets

This article examines the short- and long-run dynamics among institutional capital flows and returns in private real estate markets. At the aggregate U.S. level, we find evidence that lagged institutional flows significantly influence subsequent returns. When disaggregating by property type at the national level, we find that capital flows predict subsequent returns in the apartment and office sectors, but not in the retail and industrial markets. At the metropolitan level, we find that the flows help explain subsequent returns in a limited number of core business statistical areas (CBSAs), although these CBSAs collectively represent about 30% of institutional capital. We find no evidence that institutional returns are predictive of future capital flows at the national or CBSA level, suggesting that institutional investors are not chasing returns.     

A methodological note on diversity measurement

This research addresses the question, do categorical and continuous measures capture the same construct of diversity? Using analysis of variance, cluster analysis, and discriminant analysis, we investigated whether continuous measures (entropy and product count) differentiate between diversification categories, whether continuous measures converted to categories and subjectively assigned categories classified companies similarly, and whether continuous and categorical measures predicted similar diversity–performance relationships. We concluded that the techniques were associated but did not yield the same performance predictions. For researchers investigating diversity–performance relationships, choice of measurement technique will influence research results. Our research results suggest that attempts to combine categorical and continuous techniques as a way to overcome the limitations of both methods is not appropriate.     

The recency of technological inputs and financial performance

Inventions differ in terms of the age of the knowledge base they build upon. We examine what effects differences in the recency of knowledge inputs have on financial performance. Using threshold regression analysis, we isolate three regimes that exhibit different associations between recency and stock return. We find that for firms whose new patents use inputs in the mid‐range of the technological recency distribution, the relationship is positive; higher recency leads to higher stock return. However, for firms whose new patents make use of either nascent or very mature technological inputs, the effects are negative; higher recency leads to lower stock return. These findings indicate that it is not firms utilizing the most recent technological inputs that experience the highest returns to their inventive activity. Indeed, firms operating at the technological input frontier have market returns significantly below the mean. Rather, it is firms whose new patents utilize medial‐aged technological inputs (i.e., firms using inputs slightly behind the technology frontier) that tend to experience the highest returns. Copyright © 2008 John Wiley & Sons, Ltd.     

Privatization and production efficiency in Taiwan's telecommunications industry

Many managers, economists, and policy-makers have long believed that the production of a private enterprise is more efficient than that of a public one. This paper investigated whether it was good policy to privatize Taiwan's telecommunications industry by comparing the changes in efficiency in Chunghwa Telecom Company (CHT Co.) before and after privatization. The data envelopment analysis (DEA) model was used to evaluate their operational performance both pre- and post-privatization. The technical efficiency (CRS) computed with the CCR model assuming constant returns to scale, the technical efficiency (VRS), and the scale efficiency (VRS) were obtained with the BCC model assuming variable returns to scale, using the time-series data from CHT. The findings of this study show that the production efficiencies of CHT, both pre- and post-privatization are inefficient since all of the technical efficiencies are smaller than one.     

A Comparison of the Recent Performance of Publicly Traded Real Property Portfolios and Common Stock

In this study we compare the returns earned by investments in publicly traded limited partnerships (PTLPs), finite life equity REITs, and traditional equity REITs with those resulting from investing in common stocks (proxied by closed-end mutual funds). Performance comparisons are made using generalized stochastic dominance (GSD). This tool avoids the joint hypothesis problem that arises when an asset pricing model is used as a performance benchmark. The results of the analysis indicate that the performance of the closed-end mutual funds was preferred to that of the individual equity REITs (both traditional and finite life) and PTLP securities by a wide array of risk-averse investors. This result was most pronounced following the passage of the Tax Reform Act of 1986 which severely restricted the tax deductibility of real estate losses. When the equity REITs were combined into portfolios, their performance dominated the mutual funds during the 1980–85 period. Further, the PTLP portfolio returns were preferred to several of the mutual funds even in the post-1985 period. These findings reflect the fact that the securitized real property portfolios studied are not as well diversified as mutual funds. However, the mutual funds remained the dominant investment alternative in the post-1986 period.     

FORM OF CONTROL: A CRITICAL DETERMINANT OF ACQUISITION PERFORMANCE AND CEO REWARDS

Based on two research streams, we investigate whether acquiring firms’ form of control might be associated differently with CEO rewards or excess returns. We theoretically reason that in manager-controlled corporations acquisitions may be detrimental to the interests of shareholders and CEO rewards might be based on nonperformance criteria. In owner-manager-controlled and owner-controlled firms acquisitions may benefit the stockholders. While CEO rewards of owner-controlled firms may be based on performance criteria, however, executive rewards of owner-manager-controlled firms may be based on both performance and nonperformance factors. The findings indicate that for manager-controlled firms acquisition announcements result in negative excess returns to shareholders. For owner-controlled and owner-manager-controlled firms such announcements result in positive excess returns. The findings also suggest that increases in corporate size due to acquisitions are significantly and positively associated with CEO rewards of manager-controlled and owner-manager-controlled firms. For owner-controlled firms, excess returns are significantly and positively associated with CEO rewards. © 1997 by John Wiley & Sons, Ltd.