This paper examines the impact of real estate prices on firm capital structure decisions. For a typical US listed company, a one standard deviation increase in predicted value of firm pledgeable collateral translates into a 3 percentage points increase in firm market leverage ratio. The identification strategy employs a triple interaction of MSA level land supply elasticity, real estate prices and a measure of a firm's real estate holdings as an exogenous source of variation in firm collateral values. Firms significantly change their debt structure: they increase their bank but also arm's length financing and they decrease more expensive types of debt in response to collateral value appreciation. These results indicate the importance of collateral values in mitigating potential informational imperfections.
Research Papers - Real Estate
We study the sensitivity of CEO compensation to luck using real estate prices to differentiate changes in compensation due to pure luck from changes in compensation due to reactions to lucky events. We find that that pay for luck is explained mostly by reactions to lucky events rather than pure luck. Our identification relies on the fact that changes in real estate prices affect market performance irrespective of managerial actions, while accounting performance is only affected if the manager reacts to the shock. In addition, our findings suggest that firms anticipate pay for luck and offer less equity-based compensation to CEOs that are more exposed to the real estate market. Interestingly, our results are not explained by corporate governance. Our results are consistent with the contracting view that CEOs are not rewarded for pure luck
This chapter reviews the evidence of predictability in US residential and commercial real estate markets. First, we highlight the main methodologies used in the construction of real estate indices, their underlying assumptions and their impact on the stochastic properties of the resultant series. We then survey the key empirical findings in the academic literature, including short-run persistence and long-run reversals in the log changes of real estate prices. Next, we summarize the ability of local as well as aggregate variables to forecast real estate returns. We illustrate a number of these results by relying on six aggregate indexes of the prices of unsecuritized (residential and commercial) real estate and REITs. The effect of leverage and monetary policy is also discussed.