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.     

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.     

Gains From Diversifying Into Real Estate: Three Decades of Portfolio Returns Based on the Dynamic Investment Model

This paper compares the investment policies and returns for portfolios of stocks and bonds with and without up to three categories of real estate. Both domestic and global settings are examined, with and without the possibility of leverage. The portfolios were generated via the dynamic investment model based on the empirical probability assessment approach applied to past (joint) realizations of returns, both with and without correction for "smoothing" in the real estate data series. Our principal findings are: (1) the gains from adding real estate, on a semi-passive (equal-weighted) basis, to portfolios of either U.S. or global financial assets were relatively modest; in contrast, (2) the gains from adding real estate to the universe of U.S. financial assets under an active strategy were rather large (in some cases highly statistically significant), especially for the very risk-averse strategies; (3) the gains from adding U.S. real estate to a universe of global financial assets under an active strategy were mixed, although generally favorable for the highly risk-averse strategies; (4) correcting for second-moment smoothing in the real estate returns series had a relatively small impact for the more risk-tolerant strategies; and (5) there was some evidence that desmoothing resulted in improved probability estimates.     

Total factor productivity enablers in the ICT industry: A cross-country firm-level analysis

Advancements in productivity in the digital economy constitute an important engine for economic growth. What drives productivity dynamics in the information and communication technology (ICT) sector? This study examines the productivity dynamics of ICT firms across countries from the perspective of corporate balance sheets. We study the effects of intangible assets and leverage on productivity growth using firm-level panel data from five industrialized countries. We find that intangible assets positively affect the total factor productivity in the ICT sector. The positive effect of intangible assets on total factor productivity growth is larger for ICT manufacturing firms than for ICT service firms. We also find that leverage has a positive relationship with total factor productivity development in the ICT sector. In addition, our empirical results substantiated that productivity is catching up to the technological frontier. Furthermore, larger firms and/or younger firms generally show higher total factor productivity growth than their peers. Economies of scale are more prominent in the ICT service sector than in the ICT manufacturing sector. Our findings contribute to the understanding of cross-country productivity dynamics in the ICT sector at the firm level in the digital economy.     

The Role of the Underlying Real Asset Market in REIT IPOs

A leading explanation for IPO cycles is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this hypothesis using REIT IPOs, taking advantage of the relative transparency of the underlying real asset markets. We document links between REIT IPO activity and both the conditions of the underlying real estate market and the price of REITs. We find no significant relation between the heat of the IPO market and post-IPO operating performance, implying homogeneous firm quality across IPO cycles. Finally, we show that lagged IPO proceeds are related to future increases in investment and in capacity utilization.     

Real Assets,Liquidation Value and Choice of Financing

We use real estate firms to examine how asset liquidation values influence a firm's financing choice, because the productivity and quality of each asset is observable and potential measures of an asset's liquidation value are easier to ascertain ex ante. We show that compared to firms that issue equity, firms that issue debt have higher asset quality. The effect of their expected asset liquidation value is significant, even after we control for other factors that influence financing decisions. For firms whose assets' quality is not easily observable, we find that firms' financing choices depend heavily on conditions in the overall real estate market.     

The Separation of Real Estate Operations By Spin-Off

In this paper, we consider spin-offs as a vehicle to separate real estate operations from other real estate and/or non-real estate operations. For a sample of 33 such spin-offs announced and completed between 1962 and 1982, we document significantly positive abnormal returns around spin-off announcements. Using the standard event-time methodology, we find average excess returns of 5.7% in the two-day interval surrounding the first Wall Street Journal report of a pending spin-off. While the gains associated with spin-offs by real estate firms are positive on average, they are small in comparison to the 9.1% two-day announcement period abnormal returns surrounding proposals by non-real estate firms to divest real estate operations.     

Corporate Real Estate Ownership and Productivity Uncertainty

This article empirically tests the relationship between corporate real estate (CRE) holdings and productivity risks of firms. Using a large sample of public listed U.S. firms for the period from 1984 to 2011, we show that CRE ownership is significantly and negatively correlated with productivity risks of firms. Firms with high‐productivity risk own less CRE assets. When testing dynamic changes to CRE holdings, we estimate a significant and positive elasticity of CRE investments of 5.2% in response to cash flow shocks. If the adjustment cost is high, high‐risk firms are expected to hold less CRE assets, so that they could reduce potential losses associated with CRE holdings when negative productive shocks occur.     

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.     

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 Gains from Corporate Selloffs: The Case of Real Estate Assets

Recent financial economics literature has hypothesized that variations in market structure influence the distribution of gains from corporate restructuring between buyers and sellers. We test this hypothesis using data on restructuring involving real estate assets by isolating the effects depending on multiple versus single bidders, acquisition frequency and transaction type. While we find gains for both buyers and sellers, the buyers gain only when they make few purchases. Those firms pursuing an acquisition strategy show no gains around the specific acquisition announcements. Additionally, both buyers and sellers are more likely to have a positive reaction to the announcement when the transaction is property rather than a division or subsidiary.     

Pension-Plan Real Estate Investment in an Asset–Liability Framework

This study explores the role of pension-plan real estate investment in an asset–liability framework. By assuming that the pension-plan manager wishes to have assets of at least equal value to the liabilities at all points in time, an asset selection process is derived which depends on both the asset's covariance with other assets and its covariance with the liability stream. We generally find real estate not to be highly correlated with pension-plan liabilities. This finding is of general interest, since it helps to explain why pension-plan real estate investment is extremely limited and much smaller than one would expect if pension-plan investors cared only about the mean and variance of the real return to their invested wealth.     

Performance of acquirers of divested assets: Evidence from the U.S. software industry

We provide a comparative analysis of acquirer returns in acquisitions of public firms, private firms, and divested assets. On the basis of a sample of 5,079 acquisitions by U.S. software industry companies during 1988–2008, we find that acquisitions of divested assets outperform acquisitions of privately held firms, which in turn outperform acquisitions of publicly held firms. While the higher returns for acquisitions of divested assets relative to stand‐alone acquisition targets can be explained by market efficiency arguments, seller distress and improved asset fit further enhance the positive returns of acquirers of divested assets consistent with the relative bargaining power explanation. Finally, we find that the effects of these buyer bargaining advantages are mutually strengthening and that they also hold for longer‐term acquirer performance Copyright © 2013 John Wiley & Sons, Ltd.     

Bribery and investment: Firm‐level evidence from Africa and Latin America

Research summary : Using a unique database that measures firm‐level bribery in Africa and Latin America, we corroborate extant results in the literature that paying bribes deters firm investments in fixed assets. Our contribution is to explore four mechanisms. By adopting a reverse causality approach (Gelman and Imbens, 2013), we find evidence consistent with one of them: short‐term oriented firms prefer to bribe rather than invest in fixed assets, while the opposite is true for firms with a long‐term orientation. We rule out that bribe payments drain financial resources for investment, that firms that invest do not bribe because fixed assets make them less flexible and more vulnerable to future bribes, and that less efficient firms bribe rather than invest. Managerial summary : We ask whether, along with ethical issues, bribing affects the behavior and performance of firms in Africa and Latin America. Our statistical analysis shows that bribe payments do not reduce the short‐term performance of firms, but frustrate investments in fixed assets, which is the foundation of firms' long‐term growth. It is like seeking a job via nepotism or education. Nepotism makes it likely to find a job in the short term. However, the solid skills generated by education raise the odds of finding better jobs in the future. We rule out some common explanations for the trade‐off between bribing and investment (e.g., bribes drain resources to invest or that less efficient firms bribe and do not invest). Our analysis suggests that firms with short‐term orientations are more likely to bribe and firms with long‐term orientation are more likely to invest. Copyright © 2015 John Wiley & Sons, Ltd.     

Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation

Using the actual quarterly rental income generated in the years between 2001 and 2010 by over 9,000 NCREIF commercial properties, we construct a commercial real estate rental index and estimate the time series properties (e.g., mean‐reversion speed and volatility) of market‐wide rental growth using a dynamic panel data model. The dynamic panel data model has several advantages over a standard hedonic regression. In addition, we incorporate age effects into our panel data model, and by doing so we correct the age bias in the repeated sales method and in the simple average method. Our estimates show that rental growth is cyclical but it generally lags behind broader economic growth. Surprisingly, the long‐term average rental growth is significantly lower than what is usually perceived, and the volatility of rental growth can be significantly under estimated when the conventional methods are adopted. We also find significant cross‐property type and cross‐region variations in the rental adjustment process. In contrast to the existing literature, we find a strong negative relation between rental growth and cap rate, and that this relation is significantly stronger than that between NOI growth and cap rate. Finally, we establish an empirical relation between price return and rental growth in the commercial real estate market.     

Investment Analysis,Price Formation and Neglected Firms: Does Real Estate Make a Difference?

This paper examines the relation between information-gathering activities and price formation when the gatherers are small in number. Two measures of information asymmetry are estimated to test the cross-sectional effect of investment-analyst attention on price formation. The analysis contrasts firms that invest predominately in real estate assets to those that do not. Unlike most studies of the competition among information gatherers, the results in this paper indicate that liquidity worsens with increasing investment-analyst attention. These findings provide further evidence that information deficiency is an important economic trait, although real estate securities may suffer less from neglect than from asset-specific information asymmetry.     

International Real Estate Returns: A Multifactor, Multicountry Approach

We examine the risk and return characteristics of publicly traded real estate companies from 14 countries over the period 1990 to 2001. Our data are monthly country-level commercial real estate indexes constructed by the European Public Real Estate Association (EPRA). We find substantial variation in mean real estate returns and standard deviations across countries. Using various global- and country-level factor models, we find that there is evidence of a strong global market risk component, measured relative to the Morgan Stanley Capital International world index, in most countries. However, even after controlling for the effects of global market risk, an orthogonalized country-specific market risk factor is highly significant, especially for real estate indexes in Asia–Pacific markets. We find that a country-specific value risk factor has some explanatory power in addition to the country-specific market factor, but U.S.-based market, value and size risk factors do not provide any additional explanatory power. These findings imply that the international diversification opportunities with real estate companies are more complex than previously thought.     

Sell-Offs of U.S. Real Estate: The Effect of Domestic versus Foreign Buyers on Shareholder Wealth

Large foreign acquisitions of U.S. real estate always seem to generate considerable public concern. Most recently the reaction has been to Japanese purchases, but similar reactions occurred to Arab petro-dollar purchases in the early 1970s. This study examines the impact of the buyer's nationality on the change in the wealth of the selling firm's shareholders for voluntary sell-offs of U.S. real estate. In general, this study indicates that voluntary sell-offs of real estate assets result in a significant increase in the wealth of the selling firm's shareholders. However, the change in the wealth of the selling firm's shareholders for U.S. buyers was not significantly different from that for non-U.S. buyers. Since no advance is indicated for foreign buyers over domestic buyers, laws or regulations hindering the foreign acquisition of U.S. real estate cannot be supported. The assumption of a "non-level playing field" for U.S. real estate investors who bid against foreign firms for U.S. real estate assets is not confirmed.     

Regime Shifts in Asian Equity and Real Estate Markets

This paper applies a new statistical technology for identifying regime shifts to analyze recent data on real estate and equity markets in eight developing Far Eastern countries in the 1992–1998 time period. We find that regime shifts in volatility occur in the summer of 1997; however, most of the regime shifts in returns occur in the spring of 1998. While the clustering of regime breaks does not seem to follow any obvious pattern, the country's exposure to trade and firm leverage are important. An analysis of Granger causality suggests that, in most cases, equity returns cause real estate returns but the converse is not true. We also find two-way causality in volatility, suggesting that a common factor drives volatility in these markets. Finally, we provide evidence that the regime shifts generally imply higher relative risk for real estate securities after the estimated breaks.     

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.