The determinants of office cap rates: The international evidence

We examine commercial office cap rates in 89 large cities in 33 developed and developing countries in the 2000–2019 period. We find that cap rates decline throughout the world over this period, reflecting a corresponding decline in the real rate of interest. In the cross-city analysis our most robust findings are that office cap rates are lower in wealthier cities, especially those that are either considered gateway cities or financial centers. In addition, cap rates tend to be higher in countries with lower credit ratings and higher inflation rates. We find that cap rates in suburban office markets are higher than in central business districts, and for a given metropolis, suburban cap rates are lower in suburbs with better public transport connections to the central business district. Finally, evidence from regressions with city fixed effects reveal that cap rates rise as the discount rate and vacancy rates increase and fall as cities get wealthier.     

Feedback from Stock Prices to Cash Flows

Feedback from financial market prices to cash flows arises when a firm's nonfinancial stakeholders, for example, its customers, employees, and suppliers, make decisions that are contingent on the information revealed by the price. Complementarities across stakeholders result in cascades, wherein relatively small stock price moves trigger substantial changes in asset values. This paper analyzes the relation between such feedback effects and parameters such as the information cost, the volatility of existing projects, the risk aversion of liquidity suppliers, and the precision of managerial information.     

Overreaction, delayed reaction, and contrarian profits

This article examines the contribution of stock price overreactionand delayed reaction to the profitability of contrarian strategies.The evidence indicates that stock prices overreact to firm-specificinformation, but react with a delay to common factors. Delayedreactions to common factors give rise to a size-related lead-lageffect in stock returns. In sharp contrast with the conclusionsin the extant literature, however, this article finds that mostof the contrarian profit is due to stock price overreactionand a very small fraction of the profit can be attributed tothe lead-lag effect.     

Portfolio performance evaluation: old issues and new insights

This article presents a model that provides insights about variousmeasures of portfolio performance. The model explores severalcriticisms of these measures. These include the problem of identifyingan appropriate benchmark portfolio, the possibility of overestimatingrisk because of market-timing ability, and the failure of informedinvestors to earn positive risk-adjusted returns because ofincreasing risk aversion. The article argues that these neednot be serious impediments to performance evaluation.     

REIT and Commercial Real Estate Returns: A Postmortem of the Financial Crisis

In the years surrounding the financial crisis, the share prices of equity Real Estate Investment Trusts (REITs) were much more volatile than the underlying commercial real estate prices. To better understand this phenomenon we examine the cross‐sectional dispersion of REIT returns during this time period with a particular focus on the influence of their capital structures. By looking at both the debt ratio and the maturity structure of the debt, we separate the pure leverage effect from the effect of financial distress. Consistent with leverage and financial distress costs amplifying the price decline, we find that the share prices of REITs with higher debt‐to‐asset ratios and shorter maturity debt fell more during the 2007 to early‐2009 crisis period. Although REIT prices rebounded with the bounce back in commercial real estate prices, financial distress costs had a permanent effect on REIT values. In particular, we find that REITs with more debt due during the crisis period tended to sell more property and issue more equity in 2009, when prices were depressed.     

Factor pricing in a finite economy

Prior theoretical derivations of the Arbitrage Pricing Theory (APT) bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation. It is conceivable, given this bound, that some assets might be badly mispriced by the model. In this paper, a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis. The deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth. It follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets.     

The Effect of Corporate Governance on Investment: Evidence from Real Estate Investment Trusts

This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of real estate investment trusts (REITs). We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership or if they have lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies as well as with high insider ownership allowing managers to follow their own investment agendas.     

DESIGNING CAPITAL STRUCTURE TO CREATE SHAREHOLDER VALUE

In the past decade, many U.S. companies have launched aggressive share repurchase programs with the expectation that value can be created by returning excess capital to shareholders and moving the firm closer to its optimal capital structure. But how much capital does a company really need to support its business activities? This article presents an economic framework or “model” that can be used to simulate the effect of various capital structure choices on shareholder value. The fundamental insight underlying the model is that judicious use of debt can add value by reducing corporate taxes and strengthening management incentives to increase efficiency, but that too much debt can result in a loss of business and perhaps a costly reorganization. Indeed, one of the key findings of the authors' recent research is that companies with highly leveraged balance sheets suffer disproportionately large losses in market share and value during industry downturns. As illustrated in a case study of a hypothetical general merchandiser, the model makes it possible to identify an optimal debt-equity ratio (and percentage of fixed- versus floating-rate debt)—one that balances the value of the tax shield from debt against the increased risk of financial distress.     

The valuation effects of stock splits and stock dividends

This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signalling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.