Do Mergers Improve Information? Evidence from the Loan Market

We examine the informational effects of M&As by investigating whether bank mergers improve banks' ability to screen borrowers. By exploiting a data set in which we observe a measure of a borrower's default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while nonrisky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using "hard" information more intensively.     

What Do Investment Banks Truly Bring to the Table?

This paper investigates the role of intermediaries in the initial public offering (IPO) process. In the U.S. market, investment banks have traditionally been involved in a firm‐commitment or best‐efforts underwriting capacity. However, in the Australian IPO market, investment banks are increasingly being named in association with new issues in diverse roles such as issue managers, sponsoring brokers and corporate advisers. Using a sample of 468 IPOs over the 1996 to mid‐2006 period, we examine the influence of investment banks across these different engagements. In support of the signalling and information production roles of intermediaries, we find that issuers choosing high intermediary involvement are typically older, retain more capital, seek to raise larger amounts of capital and are without independent expert certification. We find mixed support for the certification hypothesis when testing for the effect of intermediary reputation on IPO issuer wealth loss. Further, the impact of intermediary involvement on underpricing is not significantly different for the different levels of intermediary involvement once issue characteristics have been accounted for. This is puzzling since these different roles by definition do not provide the same level of issue quality assurance.     

How Do Institutional Factors Affect International Real Estate Returns?

Prior international real estate studies recognize the importance of country-specific factors for explaining real estate security returns. Using firm level observations from the FTSE NAREIT/EPRA Index for 2004?C2006, we construct a set of multifactor multivariate statistical regression models to identify and pin-point country-specific institutional features that determine differences for excess real estate security returns. Our analyses indicate that the excess real estate returns (i.e., required risk premiums) are, in part, determined by the quality of a country??s legal system and the corporate governance environment, controlling for various country-specific macro-economic variables and firm-level characteristics. We further find that the impact of institutional factors on international real estate returns is more prominent in the Asia-Pacific Region, and recent development of the REIT structure across the world does not alter the importance of corporate governance and legal system quality for determining real estate returns.     

Who Says there is a High Consensus Among Analysts when Market Uncertainty is High? Some New Evidence from the Commercial Real Estate Market

This paper seeks to determine whether analyst consensus is a function of the level of price informativeness, and therefore attempts to gauge the extent to which analyst consensus is high when market uncertainty is high. There is the view that a small or declining volume of trading implies less information and lower quality information, and that a lower level of price informativeness will lead analysts to put more weight on their private information at the time of forecasting. We add to this view the notion that when uncertainty is high there might be a positive option value of waiting. In this case, it appears reasonable to conclude that analysts may actually lack consensus when uncertainty is high. If this hypothesis is correct, then one would expect the level of price informativeness to override the Keynesian incentive “to fail conventionally than to succeed unconventionally” or at least reduce its magnitude in periods of declining trading volume and low price discovery. Tests of this hypothesis produce favorable results.     

What Drives the Property Price-Trading Volume Correlation? Evidence from a Commercial Real Estate Market

The significant price-trading volume correlation found in the residential property market presents a challenge to the rational expectation hypothesis. Existing theories account for this fact with either capital market imperfection (down-payment effect or loss-aversion consideration) or imperfect information (search theoretic models). This paper employs data from a commercial real estate market, which face a different degree of severity of capital market constraint than the residential market, and thus provide an indirect but effective test for alternative theories. Policy implications are also discussed.     

International Real Estate Mutual Fund Performance: Diversification or Costly Information?

We investigate the net effect between diversification benefit and information cost of international real estate mutual funds from three dimensions: whether investors can benefit from investing in international real estate mutual funds, whether managers of international real estate mutual funds possess superior market knowledge and timing abilities, and whether investors are motivated by returns or diversification. Our findings are threefold. First, the results show that international real estate mutual funds perform better and are less risky than domestic real estate mutual funds before Jun 2007. That is, diversification benefits outweigh the information costs, and investors therefore gain from investing in international real estate mutual funds. However, the benefit is reduced because of the economic shock of sub-prime financial crisis. Second, on average, neither international mutual fund managers nor domestic mutual fund managers possess market timing abilities. Finally, we find that fund flows are driven by investors’ return-chasing behaviors and fund size, but not by diversification purpose.     

List Price Information in the Negotiation of Commercial Real Estate Transactions: Is Silence Golden?

We examine the use (and non-use) of list price information in the process of marketing commercial real estate. While housing market research suggests that list prices can serve as a strong anchor and/or signal, list price information is included in less than one-third of the commercial property sales and is less likely to be included as part of the sellers’ offering information for larger and more complex properties. Given the potentially powerful effect of list prices (first offers) on outcomes, the non-use of list price information is a puzzle. We speculate that the limited use of list prices may be due to the sellers’ interests in both maintaining their informational advantage and not truncating higher than expected offers, especially during periods of economic growth or with more complex properties. Using a two-stage selection correction model, we find that office properties which provide list price information are, on average, associated with lower price outcomes (ceteris paribus) and that these outcomes vary by price cohort and economic condition. It is important to note, however, that while these findings identify a correlation, they do not necessarily imply causation. Our results support the notion that asymmetric information and information signaling play a dominant role in explaining the sellers’ strategic non-use of list price information in the commercial real estate market and that the signaling effect is more pronounced in higher priced properties and during periods of strong economic growth.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Is the Compensation Model for Real Estate Brokers Obsolete?

This study examines the traditional compensation model for real estate brokers under which both the listing and buyer brokers are paid by the seller based on a percentage of the property sales price. We argue that this model has not evolved to reflect contemporary legal agency relationships and technology-driven information availability. It therefore creates substantial transactional inefficiencies for buyers and sellers at both the matching and bargaining stages of a transaction. While there is evidence that market forces are pushing for a change in the status quo, there is also evidence that the brokerage industry is resisting this change by pursuing anti-competitive policies and laws. We explore the economics of the current and alternative compensation structures and suggest policy implications regarding anti-competitive behavior in the brokerage industry.

Do Buyer Incentives Work for Houses during a Real Estate Downturn?

The impact of incentives on marketing duration is examined for residential real estate using data from the Multiple Listing Service during a real estate downturn. The focus is on incentives offered directly by sellers to potential homebuyers. The evidence suggests that incentives are not capitalized into the selling price during the softened market conditions. Alternatively, incentives are found to have a significant reduction in marketing time, however this is found to be true only for closing costs and not for other incentive classifications. The benefit of reduced expected market time from offering incentives is quickly diminished when the seller initially overprices the listing by a large amount.     

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998?C2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm??s production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of off-balance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.     

Do Domestic Institutional Trades Exacerbate Information Asymmetry? Evidence from the Korean Stock Market

Asia-Pacific Financial Markets - We analyze a trading dataset from the Korean stock market, a representative and leading emerging equity market, to study the impact of domestic institutional trades...     

Industrial Real Estate Investment: Does the Contrarian Strategy Work?

The superiority of the contrarian investment strategy, though well attested to in the finance literature, has received scant attention, if any, in the real estate literature. This study uses empirical industrial real estate investment return data from 1985Q1 to 2005Q3 for the US, and some Asia Pacific cities in order to ascertain the relative superiority of “value” and “growth” industrial real estate investments. The results show that “value” industrial property investment outperformed “growth” industrial property investment in all the holding periods under consideration. Furthermore the industrial property investments exhibit return reversal. This implies that the superiority of the contrarian strategy is sustainable. The results of stochastic dominance tests validate the relative superiority of “value” over “growth” industrial property investment. This implies that fund managers who traditionally have been favoring prime (i.e. growth) industrial property investment may have to reconsider their investment strategy if they want to maximize their return.     

Do Some People Work Harder than Others? Evidence from Real Estate Brokerage

The decision to work and its levels of intensity are estimated for the real estate brokerage industry where workers can set their own hours. A three-stage model of the brokerage labor market is presented with decisions made recursively between full- and part-time status, wage offers and hours worked. The application is to data from a cross-sectional survey of 6,842 real estate licensees in the United States for 1999. Conditional on self-selection, an expected wage for real estate licensees is estimated given skills and personal characteristics. That expected wage enters the supply-side equation for the number of hours worked. The findings indicate that skills such as education, experience and licensee status are related to higher wages, but there is a negative self-selection in wages: part-time workers have higher unmeasured skills. Schooling and experience decreases hours worked, consistent with increasing efficiency. The resulting labor supply elasticity with respect to the wage is 0.24.

Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds

Besides the more commonly used REITs, German investors can also invest in a lesser-known real estate vehicle, Open-ended Property Funds. OPFs are considered a compromise between listed and direct real estate investments. OPF fund managers generally provide daily (perfect) liquidity. However, if liquidity falls below 5%, share redemptions in these funds can be temporarily suspended for a period of up to two years. During this time, investors will only be able to sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to analyze whether OPFs add value to investor portfolios above that provided by REITs. We show that OPFs have a diversification advantage over REITs in low-risk portfolios, despite their larger potential liquidity risk. REIT liquidity is comparable to that of ordinary common stock, but OPFs exhibit an average initial discount to funds’ NAV of about 6% when share redemptions are temporarily suspended. However, in the long-run, this potential redemption suspension does not negatively influence OPF performance (in case OPFs reopen again). This makes OPFs an attractive investment alternative to REITs for investors who have a high level of risk aversion and a long-term investment horizon, such as endowments, insurance companies, and pension funds.     

Do Publicly Traded Property–Casualty Insurers Cater to the Stock Market?

This article examines the catering theory in the insurance industry. We investigate whether managers of publicly traded insurers pursue a growth strategy catering to the stock market's preference. Two hypotheses are tested in this study: (1) an insurer will devote more efforts to increasing premium growth when the stock market places greater values on growth, and (2) this catering effect will be more pronounced at firms where managers have greater incentives to maximize short‐term stock prices. We find evidence supporting both hypotheses. Our study discovers a new channel through which the stock market and executive compensation affect insurance companies’ business strategies and the insurance market. The implication of the interplay between insurers and the stock market is significant and deserves future research.     

The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?

Journal of Financial Services Research - I analyze the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act’s...     

Paying for a Name? Comparing the Performance of Franchised Real Estate Brokerage Firms

The Journal of Real Estate Finance and Economics - This paper compares the relative performance of franchised and independent real estate brokerage firms. One problem that arises when comparing the...     

Are Liquidity and Information Risks Priced in the Treasury Bond Market?

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure-based measures of liquidity. Information risk is measured by the probability of information-based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.