Efficient frontiers in estate planning

This article explores the nature of the efficient frontier in probabilistic estate planning for 16 different estate plans by considering as random variables ages at death, rates of return on assets, and borrowing rates on debts. The simulation considers two couples, one middle aged, the other elderly. Two 16 × 16 matrices, one for each couple, are used to record and compare the results of every simulation. That comparative data, in conjunction with the coefficient of variation based efficient frontier, contain useful information for couples who, consistent with their levels of risk, desire to maximize the net present value of assets passing to their heirs. The efficient frontier is shown to be a function of three factors: assumptions, ages of the estate owners, and the discount rates of the heirs. Because of the instability shown in the efficient frontier, estate planners and estate owners must carefully examine not only the estate plans which fall on the efficient frontier but also those estate plans which fall just off that frontier.     

Do a firm's equity returns reflect the risk of its pension plan?

This paper examines the empirical question of whether systematic equity risk of US firms as measured by beta from the capital asset pricing model reflects the risk of their pension plans. There are a number of reasons to suspect that it might not. Chief among them is the opaque set of accounting rules used to report pension assets, liabilities, and expenses. Pension plan assets and liabilities are off-balance sheet and are often viewed as segregated from the rest of the firm, with its own trustees. Pension accounting rules are complicated. Furthermore, the role of the Pension Benefit Guaranty Corporation clouds the real relation between pension plan risk and firm equity risk. The empirical findings in this paper are consistent with the hypothesis that equity risk does reflect the risk of the firm's pension plan despite arcane accounting rules for pensions. This finding is consistent with informational efficiency of the capital markets. It also has implications for corporate finance practice in the determination of the cost of capital for capital budgeting. Standard procedure uses de-leveraged equity return betas to infer the cost of capital for operating assets. But the de-leveraged betas are not adjusted for the risk of the pension assets and liabilities. Failure to make this adjustment typically biases upward estimates of the discount rate for capital budgeting. The magnitude of the bias is shown here to be large for a number of well-known US companies. This bias can result in positive net present value projects being rejected.     

Liquidating a remainder interest: simplifying personal finance

There are many ways in which decedents leave property in trust for their heirs. One technique is to grant a life estate to surviving children. The purpose of this paper is to describe verbally, and through example, an approach to liquidating a life estate. This simplification in personal finance involves a “buyout” of the interests of the remaindermen. The result is dissolution of the trust, leaving the income beneficiaries to manage, as owner in fee, the remaining assets as they wish, without the expense and complexity associated with maintaining a trust.     

Corporate real estate's impact on the takeover market

This article explores the issues and problems associated with corporate real estate ownership as viewed through the takeover market. The perception held by managers is that corporate real estate assets are unique, specialized assets. This perception conflicts with financial theory which states that the market values all corporate assets based only on their expected future cash flows. Thus corporate real estate assets are priced according to their cash flows and are like other corporate assets. This study tests the hypothesis that corporate real estate is a specialized asset by examining the impact real estate assets have on the takeover market. The study uses a logit regression model in order to attempt to predict which firms become takeover targets. If corporate real estate in general is a specialized asset, then real estate is expected to be an important variable in predicting takeover targets. Although the logit model has little predictive accuracy, results from the prediction model suggest that corporate real estate plays a significant part in determining the likelihood of a firm's becoming a takeover target. The greater the real estate holdings, the greater the likelihood of a firm's becoming a takeover target.     

Unexpected Inflation,Capital Structure,and Real Risk‐adjusted Firm Performance

Managers can improve real risk‐adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk‐adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk‐adjusted performance, and (ii) their inflation‐hedging qualities are inversely related to deviations from this ‘matching‐nominals’ argument. In addition to providing managers with a vehicle to maximize real risk‐adjusted performance, our findings also provide investors with the tools to infer inflation‐hedging qualities of equity investments.     

Determinants of Real Estate Asset Allocations in Private and Public Pension Plans

Numerous studies have examined the factors associated with allocation of corporate and government pension-plan assets. Yet to date there has been no attempt to identify the sponsor-related conditions that affect the percentage of U.S. private and public pension-fund assets invested in real estate. The purpose of this article is to examine various asset-and liability-matching hypotheses regarding pension-plan asset allocations. Models are specified for both corporate and government defined-benefit plans that relate the characteristics of each plan to the percentage allocated to real estate investments. Our results confirm the existence of a significant size effect for both corporate and government pension plans, although we find mean levels of real estate allocation to be much lower than those suggested in previous real estate allocation studies. The article, however, contains some anomalous findings. In particular, our findings suggest that pension-plan sponsors do not hedge their real estate risk. We also find that pension-plan sponsors do not invest in real estate, as theory might suggest, to minimize the noise level in their pension liabilities.     

Life Annuity Insurance Versus Self-Annuitization: An Analysis From the Perspective of the Family

When comparing investment in an immediate life annuity with a payout-equivalent investment fund decumulation plan (self-annuitization), previous research focused on shortfall probabilities of self-annuitization. Chances of self-annuitization (i.e., bequests) typically have not been addressed. We argue that heirs might be willing to bear the shortfall risk of the retiree's self-annuitization since they might benefit from a bequest. Our article proposes a "family strategy" in which heirs receive the remaining investment fund on the retiree's death, but are obliged to finance the retiree if the fund becomes exhausted. We estimate the chance and risk profile of this "family strategy" from the heirs' perspective using German capital and annuity market data. We show that in many cases, our "family strategy" offers enormous chance potential with low shortfall risk. Finally, we discuss some limitations of the proposed "family strategy" when putting the concept into practice.     

An analysis of real-estate risk using the present value model

The current study uses a present value model that allows for a time-varying expected discount rate in conjunction with a VAR process to decompose real-estate risk. The study finds that the variance ofunexpected returns accounts for most of the total risk with cash-flow risk accounting for twice as much of the unexplained real-estate risk although discount rate risk is also an important factor. This dominance of cash-flow risk is found to result in a weaker mean reversion process for real estate relative to stocks. Another finding is that real estate investors tend to become apprehensive about the future when news on future cash flow is good, and thus they demand higher expected future returns.     

Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market

We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short‐selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short‐sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of liquidity risk is different for derivatives than for positive‐net‐supply assets, and depends on investors' net nontraded risk exposure. We estimate this model for the credit default swap market. We find strong evidence for an expected liquidity premium earned by the credit protection seller. The effect of liquidity risk is significant but economically small.     

Discretionary accounting choices: the case of IAS 19 pension accounting

Based on a sample of 3207 firm-year observations for the years 2005–2013, we investigate how stock-listed companies in France, Germany and the UK use two discretionary choices in their accounting for defined benefit pension plans under International Accounting Standard (IAS) 19 Employee Benefits. We first analyse companies’ decision whether to voluntarily early adopt the equity method of accounting for actuarial gains and losses. Second, we analyse companies’ choice to present pension interest cost and expected return on plan assets, or, in 2013, net pension interest cost, in operating or financial income. Our findings provide evidence that companies’ decisions to early adopt the equity method in 2005, the first year this accounting choice was available, were motivated by short-term effects on equity. Our analyses also indicate that the choice regarding where to present interest cost and expected return on plan assets in the income statement is associated with the resulting effect on Earnings before Interest and Tax. Finally, we document country-specific differences in the use of the discretion provided under IAS 19, suggesting that discretionary pension accounting choices may impede comparability.     

Does firm value move too much to be justified by subsequent changes in cash flow?

The appropriate measure of cash flow for valuing corporate assets is net payout, which is the sum of dividends, interest, and net repurchases of equity and debt. Variation in net payout yield, the ratio of net payout to asset value, is mostly driven by movements in expected cash flow growth, instead of movements in discount rates. Net payout yield is less persistent than dividend yield and implies much smaller variation in long-horizon discount rates. Therefore, movements in the value of corporate assets can be justified by changes in expected future cash flow.     

Accounting measures of unfunded pension liabilities and the expected present value of future pension cash flows

The associations between three alternative measures of the unfunded pension obligation discussed in the accounting literature and a measure that reflects the present value of expected cash flows (economic liability) are examined in this study using simulated data. The sensitivity of the correlations to funding methods, growth rates of the plan population, interest rates, plan initiation dates, and extent of sweetening are also studied. It is shown that all the accounting measures of the pension obligation are highly correlated with the total economic liability when funding is excluded, but the correlations decrease significantly when the net (unfunded) liability is examined. Furthermore, it is shown analytically that one cannot predict ex ante which measure of the unfunded liability will be most highly correlated with the economic liability. The implication for accounting standard-setting bodies is that both the pension plan assets and pension obligations should be disclosed to facilitate users in making predictions about changes in the economic liability. A recent official pronouncement, SFAS 87, provides for such disclosure in most circumstances.     

Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects across Firms

In this paper, we investigate the effect of real estate prices on productive investment. We build a theoretical framework of firms' investment with credit rationing and real estate collateral. We show that real estate prices affect firms' borrowing capacities through two channels. An increase in real estate prices raises the value of the firms' pledgeable assets and mitigates the agency problem characterizing the creditor–entrepreneur relationship. It simultaneously cuts the expected profit due to the increase in the cost of inputs. We test our theoretical predictions using a large French database. We do find heterogeneous effects of real estate prices on productive investment depending on the position of the firms in the sectoral distributions of real estate holdings.     

Is there a real estate factor premium?

In this paper, we study the variation of expected returns on five different asset portfolios in a multi-factor model. We found the presence of a real estate factor, in addition to both a stock factor and a bond factor in asset pricing. This suggests that mutual fund managers should seriously consider including real estate assets in their portfolios, since one cannot capture the real estate factor premium without having some kind of real estate exposure. Another result is that the market segmentation found in previous studies disappears in a more general model of asset pricing in which we allow for multi-factors other than the market factor to affect asset returns. This implies that real estate assets can be treated just like other assets as far as mean-variance efficient asset allocations are concerned. We also have some preliminary evidence that equity REITs and the Russell-NCREIF index are driven by the same underlying real estate factor.     

Portfolio management and retirement: what is the best arrangement for a family?

In comparing an immediate life annuity with a payout-equivalent investment fund payout plan (self-annuitization), research to date has focused mainly on shortfall probabilities of self-annuitization. As an exception, Schmeiser and Post (2005) propose a family strategy where the chances of self-annuitization (i.e., bequests) are taken into consideration as well. In such a family strategy, potential heirs must bear shortfall risks, but in return have a chance of receiving a bequest. This paper analyzes under which conditions heirs will be willing to agree to a family strategy. The idea of a family strategy is integrated into a realistically calibrated intertemporal expected utility framework, taking into account risks arising from stochastic life span, asset returns, and nontradable labor income. A family strategy is shown to be accepted for many parameter combinations, especially in families with low marginal tax rates, if the heirs are wealthy, or in a case where the retiree has an average population life expectancy. We also work out how family self-annuitization decisions interact with asset allocation, saving decisions, and labor income risk. Under realistic conditions our results support two explanations for the empirically observable low demand for annuities (the so-called annuity puzzle), namely intra-family risk sharing and high cost of market-annuitization.     

房地产税收的一般经济分析

房地产税作为地方政府理想的收入来源,对于实质性财政分权制度的建立具有非常重要的作用。关于房地产税的税负归宿问题,理论界存在三种不同的观点。但这三种观点并不是相互排斥的,在不同的情况下,每种观点可能都是有效的。按照现代资产定价理论,房地产税收通过改变住宅投资的预期增值,从而影响住宅资产价格的走势。     

A balance-sheet approach to fiscal sustainability

This paper proposes an alternative methodology to assess fiscal sustainability. Our balance-sheet approach (BSA) relies on estimating separately all of a government's assets and liabilities as opposed to focusing only on the burden of explicit liabilities. In our approach, assets are primarily the present discounted value of taxes, and liabilities include explicit liabilities but also the present discounted value of expenditures. Using the value of assets and liabilities, we compute the government's balance sheet, and therefore net worth. We then evaluate the response of net worth to growth, commodity prices or real exchange rate shocks. By computing a value for the government's net worth, our methodology allows an assessment of fiscal sustainability that is less reliant on the analyst's assumptions than traditional debt sustainability analysis (DSA).     

区块链时代破产法的机遇与挑战

区块链与破产法在维系市场主体信用方面相得益彰,区块链能够提升破产程序运转效率,实现破产程序信息披露透明,维护破产结果的公平公正。区块链资产的价值具有较大波动性,判定破产界限存在反复。区块链资产包括数据资产和数据信息两部分,识别破产财产需要区分对待。数字货币承载着价值资产和货币流通的双重角色,破产财产的定性应当审慎选择。     

Are REITs real estate? Evidence from international sector level data

The aim of this study is to examine whether securitized real estate returns reflect direct real estate returns or general stock market returns using international data for the U.S., U.K., and Australia. In contrast to previous research, which has generally relied on overall real estate market indices and neglected the potential long-term dynamics, our econometric evaluation is based on sector level data and caters for both the short-term and long-term dynamics of the assets as well as for the lack of leverage in the direct real estate indices. In addition to the real estate and stock market indices, the analysis includes a number of fundamental variables that are expected to influence real estate and stock returns significantly. We estimate vector error-correction models and investigate the forecast error variance decompositions and impulse responses of the assets. Both the variance decompositions and impulse responses suggest that the long-run REIT market performance is much more closely related to the direct real estate market than to the general stock market. Consequently, REITs and direct real estate should be relatively good substitutes in a long-horizon investment portfolio. The results are of relevance regarding the relationship between public and private markets in general, as the ‘duality’ of the real estate markets offers an opportunity to test whether and how closely securitized asset returns reflect the performance of underlying private assets. The study also includes implications concerning the recent financial crisis.     

The effects of resolution methods and industry stress on the loss on assets from bank failures

In this paper, we examine how the value of failed bank assets differs between two types of FDIC resolution methods: liquidation and private-sector reorganization. Our findings show that private-sector reorganizations do not deliver the expected cost-savings from 1986 to 1991, a period of industry distress. On a univariate basis, the net loss on assets is lower for a private-sector reorganization than for a liquidation in both a period of industry distress and of industry health. However, institutions with higher quality assets and higher franchise values are more likely to be resolved using a private-sector resolution. Once we control for this selection bias, we find that institutions that are resolved during periods of industry distress result in higher resolution costs than liquidation. During periods of industry health, private-sector resolutions are less costly than liquidations. We show that if a bank that failed during the post-crisis period instead failed during the crisis period, its net loss as a percent of assets would have been 3.232 percentage points higher. Given that the average net loss on assets ratio is 21.42 percent during our sample period from 1986 to 2007, the increase in costs is economically significant.