REGIONAL VARIATION OF MORTGAGE YIELDS AND SIMULTANEITY BIAS

This paper has important methodological implications for the literature on regional variation of mortgage yields. Previous studies typically estimate models of regional disparities in mortgage yields using single-equation regression techniques. It is well known, however, that such methods can lead to biased estimates when simultaneity exists. In this paper it is demonstrated that the single-equation approach, when applied to mortgage data from the 1980s, produces radically different results from the previous literature. It is further demonstrated that simultaneous-equations techniques resolve these apparent anomalies.     

On the Capital Structure of Real Estate Investment Trusts (REITs)

Much of the literature on capital structure excludes Real Estate Investment Trusts (REITs) due mainly to the unique regulatory environment of these firms. As such, the issue of how REITs choose among different financing options when they raise external capital is largely unexplored. In this paper, we explore two issues on the capital structure of REITs: is there a relationship between market-to-book and leverage ratios, and, is the relationship between market-to-book and leverage ratio temporary or persistent. Our results suggest that REITs with historically high market-to-book ratio tend to have persistently high leverage ratio. In essence, REITs with high growth opportunity and high market valuation raise funds through debt issues. This finding, which is robust to various specifications and econometric tests, is contrary to the financing decisions of non-regulated firms. We attribute it to the special regulatory environment of REITs where, despite no apparent benefits to debt financing, management issues debt. Comments from Robert Edelstein and others at the Maastricht–Cambridge 2005 Symposium, and an anonymous referee are gratefully acknowledged. Any remaining errors are our own.     

Are health insurers in multiple lines of business less profitable? An examination of scope economies in health insurance

In markets where companies can offer multiple products or services, production costs may decline, and profitability may increase as business scope expands. Using a sample of health insurers from 2015 to 2018 with data reported in the annual NAIC Supplemental Health Care Exhibit, we test whether scope economies exist among health insurers. We evaluate the relationship between scope and four profitability metrics—the medical loss ratio, the expense ratio, the underwriting profit ratio, and a profit efficiency measure obtained using a data envelopment analysis technique. We test two competing hypotheses from prior literature on scope economies in insurance. The strategic focus hypothesis states performance is higher for insurers that specialize in one line of business. The conglomeration hypothesis states performance is higher for insurers that operate in multiple lines of business. Our results provide evidence in support of the strategic focus hypothesis among US health insurers.     

Director Compensation and CEO Bargaining Power in REITs

We analyze director compensation for Real Estate Investment Trusts (REITs) and investigate the relations between director compensation and other measures of the board independence and board monitoring. Using 136 REITs in 2001, we find that REITs that pay higher equity-based compensation to their board members are associated with higher financial performance. Our data indicate that board equity-based compensation is positively related to the existence of an independent nomination committee, however, it has no significant relationship with board size, proportion of outside directors, CEO duality and CEO tenure and ownership.

The Long-Horizon Performance of REIT Mergers

We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust (REIT) mergers, to test whether or not the anomaly of post-merger underperformance observed in conventional firms applies to the case of REITs. Constructing synthetic benchmark portfolios controlling for firm size and for book-to-market value ratio, we find that 60-month buy-and-hold abnormal returns for REIT acquirers are significantly negative at approximately −10%, supporting the position that REIT merger acquirers underperform non-merging REITs in the long run. We find no evidence to challenge previous studies reporting positive announcement period returns for acquirers when the target is privately held, but we do find evidence that these positive returns do not persist. The long term performance of acquiring REITs is approximately the same whether the target is public or private.

Betting Against the Sentiment in REIT NAV Premiums

The Journal of Real Estate Finance and Economics - We dissect REIT NAV premiums and examine their relation to expected returns. More than half of the cross-sectional variation in NAV premiums can...     

The impact of monitor choice on insurer loss reserves

This paper examines the association between monitoring and earnings management by property-casualty insurers. Prior literature has evaluated the impact of auditors and actuaries on insurer reserving. We extend this work by considering the nonrandom nature of monitor assignment. We model the insurer decisions regarding choice of auditor and actuary jointly using a Heckman selection model. Consistent with prior literature, we account for potential loss reserving incentives that may confound these decisions. We find that the use of internal actuaries is significantly related to higher reserve errors, but this is reduced, but not fully offset, when the internal actuary is an officer of the insurer. We find lower reserve error for auditors from a Big N firm. However, the use of an auditor and actuary from the same Big N firm is significantly related to higher reserve errors.     

Health insurers' use of quality improvement expenses to achieve a minimum medical loss ratio requirement

Health insurer medical loss ratios (MLRs) are the percentage of premium dollar spent on medical claims and healthcare quality improvement expenses (QIEs). QIEs include activities to improve patient health outcomes and safety, reduce medical errors, and prevent hospital readmissions. The Affordable Care Act mandates minimum MLRs in certain health insurance markets lest rebates be paid to policyholders. QIEs are reported in all markets regardless of whether that market is subject to minimum MLR requirements. Using health insurer statutory filings for a sample of group market insurers from 2010 to 2018, we employ a mixed regression discontinuity/regression kink approach to evaluate whether QIEs are used by insurers as a potential strategy for meeting the minimum MLR requirement. We show that health insurers' QIE increase in the loss ratio until meeting the minimum MLR requirement, have a significant discontinuous jump at the threshold, and decrease above the threshold after the introduction of the MLR mandate.