Multiple State Property Options

Before taking strategic actions in property investments, consider the type and number of expansion, contraction and suspension alternatives and the future profit volatility. The optimal investment strategy for a current or prospective property owner should reflect the expected variability of future profits (rent times occupancy times units available), and current profits relative to threshold trigger profits for a variety of alternative states and actions. These alternatives include remaining idle, building and operating properties, expanding, contracting, suspending, reverting to normal service or reduced service capacity, or abandoning. A valuation model is developed for up to eight different options, each with a distinct trigger. Then numerical solutions show optimal profit triggers and valuations for each of these real options. Generally, increasing the number of options reduces the investment and abandonment triggers, and increases the values of the investment option and total option values, given these alternatives and parameters. The relevant parameters will depend on the investment context and feasible actions, but generally include interest rates, profit volatility, and irrecoverable costs of investment, expansion, contracting, suspension and abandonment. Generally increases in investment costs reduce the value of upward options, and increases the optimal triggers for exercising those options. Increases in expected profit volatility increase the value of all options, increases investment triggers and decreases abandonment triggers. These generic models may be appropriate for many contexts where the costs of changing states are partially irrecoverable, yet where management has some flexibility to alter scale, quality and pricing of assets and services.     

The Impact of Range Pricing on Marketing Time and Transaction Price: A Better Mousetrap for the Existing Home Market?

In various markets around the country, some real estate professionals are employing a new pricing strategy that involves marketing homes for sale with a price range rather than a single asking price. This strategy is often touted as a mechanism that will attract more potential buyers to look at a house and thus result in reduced marketing times for existing homes, with prices determined by competitive forces. The purpose of this study is to empirically examine whether houses using range pricing, often referred to as value range marketing, sell in the same amount of time and sell for similar prices as those marketed in the traditional manner. Two staged least squares with a correction for sample selection and Weibull duration models are used to test the hypotheses, employing a sample of 5,852 residential houses that were sold during the period January 1999 to December 2000. In contrast to claims of the strategy’s proponents, the results indicate that houses take longer to sell when using the range pricing strategy after controlling for physical characteristics and market conditions. Furthermore, there is no evidence that this strategy has any significant impact on transaction prices.     

Value Creation and Governance Structure in Reit Mergers

The Umbrella Partnership REIT (UPREIT) structure has become the dominant form of organization for U.S. REITs. We examine the utility of this corporate structure from a new perspective, finding evidence that convertible securities issued by UPREITs in payment for properties acquired from private sellers often function as instruments of corporate control, aligning the interests of new executives acquired in the transaction with those of the purchasing REIT’s shareholders. We also find evidence that these financial arrangements are used to signal information regarding the firm’s future prospects. We use a sample of 53 public–private mergers 1995–2001, in which the acquirer is a publicly traded REIT. We find that wealth effects from central managerial changes are positively related to the degree to which payment takes the form of convertible equity units of UPREIT subsidiaries, and to the minimum lock-up period for those units prior to conversion. The positive effects of longer lock-ups are evidence that financing structure can be used to reduce agency and information costs related to managerial restructuring in public–private mergers.     

Borrower Self-Selection,Underwriting Costs,and Subprime Mortgage Credit Supply

In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.     

Price Effects of Non-Traditionally Broker-Marketed Properties

This study investigates whether or not non-traditional marketing has an effect on the prices paid for residential real estate. Non-traditionally broker-marketed properties are defined as those properties that are sold with the aid of a real estate broker, but not marketed through a Multiple Listing Service (MLS). An analysis of properties that sold in this fashion offers further insight into the intermediation role of the real estate broker, as well as an opportunity to further investigate the efficiency of residential real estate markets. Specifically, we can assess whether MLS participation generates higher prices by determining whether like-kind properties price equivalently despite differences in their mode of marketing. The results show a significant and positive impact by non-traditionally broker-marketed properties on property price suggesting, for this sample, a premium of over 6% compared to like-kind properties marketed through the MLS. This premium may be a result of brokers intermediating a better matching of buyers and sellers. The observed premium also suggests a degree of market inefficiency.     

The Neighborhood Effect of Real Estate Maintenance

We investigate the economics of real estate investment when maintenance of a property enhances neighborhood value. Because a property owner does not recognize this positive externality for his/her neighbor, he/she under-maintains. Smaller properties benefit most from this externality. We show that subsidizing the maintenance expenses of properties can induce socially optimal maintenance. Without disturbing social optimality, the maintenance subsidy can be financed with either a flat tax or a tax that is proportional to the land value or the cost of the improvement. The flat tax is less costly. Commonly used subsidies in the real estate industry based on loan guarantees do not promote socially optimal maintenance.     

Pension Plan Investment Management Mandates: An Empirical Analysis of Manager Selection

We examine the impact of several factors on the selection of portfolio managers for Australian pension plan mandates. Performance measures do not affect the probability of a mandate allocation. Pension sponsors tend to choose managers with top-quartile five-year performance who have recently beaten a market benchmark. Management expenses have a negative impact on a managers chances. A surprising result is sponsors tolerance for high portfolio trading costs. Mandates are spread across manager investment styles. The style and institutional attributes of preferred managers suggest trustees reputation and prudential concerns matter, particularly for the aggregate annual mandate allocations.     

A Variance Ratio Test of the Behaviour of Some FTSE Equity Indices Using Ranks and Signs

This study utilises tests based on ranks and signs suggested by Wright (2000) in addition to the traditional variance ratio test to examine the behaviour of some UK Financial Times Stock Exchange (FTSE) stock indices. The results suggest that the null hypothesis of martingale difference behaviour of the index returns series examined in the study is rejected. The use of the nonparametric based variance ratio tests provide stronger evidence against the martingale difference behaviour than the conventional variance ratio tests, under conditions of both homoskedasticity and heteroskedasticity for the examined series. Moreover, the application of Wrights variance ratio tests in a rolling window framework, indicates that the results for the FTSE returns are consistent neither with a linear AR assumption nor with the white noise hypothesis.We are grateful to Jonathan Wright for programming help. We also thank the editor and an anonymous referee for their constructive comments. All errors and omissions remain ours.     

Earnings Predictability,Bond Ratings,and Bond Yields

We examine the role that earnings predictability plays in establishing a firm’s cost of debt capital by measuring its influence on establishing a new issue’s bond rating. In addition, we also examine the effects of earnings predictability on the initial pricing of the firm’s debt. Using new corporate bond issues from the period 1990–2000, our results indicate that the degree of predictability of a firm’s earnings is positively associated with a firm’s bond rating. Moreover, earnings predictability is also documented to be negatively associated with the offering yield. Importantly, bond rating classification accuracy is improved when specific measures of a firm’s earnings predictability are added to a robust model.JEL Classification: