Real Estate Investments,Product Market Competition and Stock Returns

By limiting operating flexibility, real estate investments are found to increase firm risk, thus expected returns. This study introduces product market competition as a critical determinant of the relation between real estate investments and stock returns. As part of capacity strategies, these investments are generally associated with increased market power and lower cash flow volatility in oligopolistic industries. I present a simple model of oligopolistic competition showing a negative relation between real estate holdings and firm beta, and empirically confirm this prediction. Controlling for product market competition enhances identification of the endogenous relation between real estate investments and stock returns.     

Short Sales and Price Discovery in the Hong Kong Real Estate Market

Indirect real estate (IRE) returns are often shown to lead direct real estate (DRE) returns. Apart from differences in liquidity, transaction costs, and management skills, the DRE market is also less complete than the IRE market—when negative shocks arrive, one can only short IRE (e.g., real estate stocks or REITs), but not DRE. This study investigates if short sales in the IRE market convey any information to the DRE market. Based on high‐frequency (weekly) property price data in Hong Kong from 2000 to 2012, we find that short sales in the IRE market led DRE returns, even after controlling for the lagged IRE returns in a VAR model. This supports an information spillover mechanism in which the DRE market learns private information that is not reflected in IRE returns. The spillover effect, however, weakened after the recent global financial crisis because the increased uncertainty over the credibility of individual firms made short sales more reflective of firm‐specific information than real estate market fundamentals.     

Residential Real Estate Brokerage Efficiency and the Implications of Franchising: A Bayesian Approach

This paper provides substantial evidence that real estate brokerage firms choosing to franchise are more cost-efficient than firms that remain independent. It uses 1995 cost data obtained from a nationwide survey of real estate brokerages to analyze the differences in firm efficiency across firm type—franchised and independent. We estimate a single stochastic cost frontier using Bayesian statistics and measure firm efficiency relative to that frontier conditional on firm type. The results indicate that real estate brokerages are relatively efficient, implying a competitive market, but franchised brokerages are substantially more efficient than their independent counterparts.     

What Does the Stock Market Tell Us About Real Estate Returns?

This paper analyzes the risks and returns of different types of real estate-related firms traded on the New York and American stock exchanges (NYSE and AMEX). We examine the relation between real estate stock portfolio returns and returns on a standard appraisal-based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal-based index after controlling for persistence in the appraisal series. The stock market reflects information about real estate markets that is later imbedded in infrequent property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon rental cash flows from existing buildings. These findings highlight the heterogeneity of securitized real estate-related firms.     

Entry,imperfect competition,and futures market for the input

We analyze firms' entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms face an entry cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge the random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), both production and output price depend on uncertainty and risk aversion. Specifically, when entry is endogenized and the futures price is not actuarially fair, access to the futures market does not lead to separation. Second, to study the effect of access to the futures market on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot price. In general, the effect of access to the futures market on the number of firms and production is ambiguous.     

Real Estate Returns and Risk with Heterogeneous Investors

This article develops a theoretical framework and formulates a unified risk metric that integrates both real estate price risk and uncertainty of time on market (TOM). We demonstrate that real estate sellers with different degrees of financial distress face not only different marketing period risks, but also receive different return distributions upon successful sales. The major findings of this article can be summarized as follows. First, we show that real estate return and risk, which account for both price and TOM risk, are investor specific, varying over investors with different financial circumstances and holding periods. Second, the traditional valuation of real estate return and risk, which is based solely on the return distribution of a successful sale without considering the uncertainty of TOM and the investor's financial circumstances, underestimates real estate risk and exaggerates real estate return. Third, our empirical applications in both residential and commercial real estate markets show that the Sharpe ratio estimated by the traditional approach is seriously overstated—to the largest extent for investors with high financial distress. In addition, we find that, given the typical 5‐ to 7‐year holding period for real estate, the Sharpe ratios estimated by integrating both price and TOM risk are much in line with the performance of financial assets. These findings can help to explain the apparent “risk‐premium puzzle” in real estate.     

Global Financial Integration and Real Estate Security Returns

Have globalization and increasing economic and financial integration affected the rates of return of publicly traded real estate companies around the world? Using a set of multifactor models for annual data for 946 firms from 16 countries over the sample period, 1995–2002, we estimate the impact of a country's economic openness on returns of publicly traded real estate firms, controlling for the effects of global capital markets, domestic macroeconomic conditions and firm‐specific variables. We find that a country's real estate security excess (risk‐adjusted) returns are negatively related to its openness. The results are robust across different multifactor model specifications and are a testament to increasing global financial integration and its interplay with the real estate sector.     

Growing with the market: How changing conditions during market growth affect formation and evolution of interfirm ties

Research Summary: Market conditions are known to matter for firm performance and growth. This study explores how changing levels of uncertainty and competition affect interfirm ties of entrepreneurial firms as markets transition from nascent to growth stage. Tracing six entrepreneurial game publishers during the growth stage of the U.S. wireless gaming market, the findings reveal that in a growth stage market, as uncertainty decreases, certain ties of entrepreneurial firms are terminated. First, existing partners may cut ties and become competitors after entering the market directly. This is a “winner's curse” as more successful firms are more likely to entice their partners to enter the market directly. Second, ties may be terminated as prominent firms that are “overwhelmed” with too many partners cut ties with low to mediocre performance, while their remaining partners enter a positive spiral of tie strength and performance. Finally, as uncertainty decreases, new firms may enter the market as competitors to prominent firms. While entrepreneurial firms with high‐ and low‐performing ties to prominent partners may find ties with these new entrants attractive, those with mediocre ties to few prominent partners find this move too risky and wait for a first mover to legitimate it. Overall, the findings show that changing levels of uncertainty and competition in growth stage markets can have different consequences for firms due to heterogeneity in their ties and power relative to partners. The findings provide several contributions to literature regarding the relationship among interfirm ties, firm performance, and market evolution. Managerial Summary: Based on interviews at six entrepreneurial game publishers in the United States and their partners, this study shows how changing levels of uncertainty and competition in growing markets can have different consequences for firms based on the different types of alliances in their portfolio and their power relative to partners. The findings highlight the importance of managing partners differently based on alliance type and goal of the partner. They advocate remaining flexible in alliance management as information asymmetries, intentions and bargaining power of partners can change and lead to abrupt alliance dissolution. They show that alliance portfolio management goes beyond a firm's capability of managing individual alliances, and provide a tool for managers to evaluate their alliance portfolios and take the necessary precautions.     

资本市场压力与企业策略性专利行为:卖空机制的视角

创新是一种不确定性高且周期长的投资活动,需要风险偏好更大、对失败容忍更高的市场环境,而资本市场具有筛选和发现创新型企业、有效分散创新风险的功能,因而对创新活动起着关键作用。然而,中国资本市场短期投资者比例高,融券交易成本高且交易不活跃,加上专利评价体系对不同质量的专利区分度较低,导致资本市场压力对创新活动没有发挥出信息机制和治理机制两种效应。相反,资本市场压力带来的负面信息表达渠道和管理层短期业绩压力,造成了中国专利申请中存在“重数量、轻质量”“重申请、轻维护”的企业策略性专利行为所衍生的“专利泡沫”问题。本文采用中国融资融券制度作为准自然实验,考察卖空机制对企业创新的影响效应和作用机理。研究发现,企业面临卖空压力时会更加积极地申请专利,但专利的申请质量有所下降,表现为专利授权率降低;专利结构有所恶化,最终授权数增加的主要是容易研发、授权快的实用新型专利和外观设计专利;专利得到授权后,企业放弃缴纳维持费用以终止专利权。这些策略性专利行为在短期内可以减少企业的卖空交易量,推高企业市值,但长期看对企业的业绩没有积极影响,是一种“创新假象”。卖空机制主要通过施压机制来影响企业创新,管理层业绩压力、外部监督压力、股价信息传递压力越大的企业,在面临卖空威慑时更有动力进行策略性专利行为。为促进企业创新向高质量发展,需要进一步完善融资融券制度和专利评价体系。     

Strategic NPV: Real Options and Strategic Games under Different Information Structures

Research summary : Among the most difficult firm strategic choices is the trade‐off between making a long‐term commitment or holding off on investment in the face of uncertainty. To operationalize strategic management theory under demand, technological and competitive uncertainty, we develop a Strategic Net Present Value (NPV) framework that integrates real options and game theory to quantify value components and interactions at the interface between NPV, real options, and strategic games. Our approach results in new propositions clarifying the way learning‐experience conditions, technological uncertainty, and proprietary information interact to tilt the balance in the interplay between wait‐and‐see flexibility and strategic commitment. As such, Strategic NPV adds to our understanding of the conditions where NPV, real options, or strategic thinking are more relevant. Managerial summary : This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade‐off between making a long‐term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning‐experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait‐and‐see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision making. Copyright © 2017 John Wiley & Sons, Ltd.     

The Investment Behaviour of Firms in an Oligopolistic Setting

Industrial organization theory has identified strategic investment in capacity as an important element in competition in oligopolistic markets. In the paper we specify a model of oligopolistic investment behaviour, and test it with panel data for 114 firms in 15 narrowly defined UK manufacturing industries in the 1970s and 1980s. The industries are distinguished according to their market characteristics as fragmented, dominant firm and dominant group sectors. The results indicate behaviour which is noncooperative in fragmented sectors, cooperative in dominant group sectors and competitive in dominant firm sectors.     

Competition under capacitated dynamic lot-sizing with capacity acquisition

Lot-sizing and capacity planning are important supply chain decisions, and competition and cooperation affect the performance of these decisions. In this paper, we look into the dynamic lot-sizing and resource competition problem of an industry consisting of multiple firms. A capacity competition model combining the complexity of time-varying demand with cost functions and economies of scale arising from dynamic lot-sizing costs is developed. Each firm can replenish inventory at the beginning of each period in a finite planning horizon. Fixed as well as variable production costs incur for each production setup, along with inventory carrying costs. The individual production lots of each firm are limited by a constant capacity restriction, which is purchased up front for the planning horizon. The capacity can be purchased from a spot market, and the capacity acquisition cost fluctuates with the total capacity demand of all the competing firms. We solve the competition model and establish the existence of a capacity equilibrium over the firms and the associated optimal dynamic lot-sizing plan for each firm under mild conditions.     

Supply Adjustments to Demand Shocks in the Commercial Real Estate Market

This paper contributes a theoretical investigation of real estate supply adjustments in the commercial real estate market. Simple theoretical linkages between the goods market (the demand side) and the space market (the supply side) are developed and then used to explain the optimal supply decisions of space producers. Propositions relating to how space production decisions are made under conditions of demand certainty, demand uncertainty and free entry are derived from optimization models. Under demand certainty, the adjustment of space supply is shown to be affected by whether an exogenous shock is perceived as mild or disastrous. Under demand uncertainty, construction based on pent-up demand is shown to be suboptimal.     

Uncertain regulatory timing and market dynamics

Using a dynamic model of capacity accumulation, I examine the relationship between uncertainty about the timing of a new Pigouvian tax and oligopolistic competition. I find that for some market structures uncertainty about the timing of the regulatory change leads firms to increase investment. These results stem from the nature of the uncertainty and its interaction with firms' strategic incentive to engage in capacity races. They dramatize the importance of accounting for initial conditions when forecasting firms' reactions to anticipated regulatory changes. In addition, I find that more protracted uncertainty leads to greater welfare costs.     

Firm growth,adaptive capability,and entrepreneurial orientation

Research summary: This paper posits adaptive capability as a mechanism through which a firm's prior growth influences the exhibition of future entrepreneurial action. Defined as the firm's proficiency in altering its understanding of market expectations, increased adaptive capability is a consequence of the new resource combinations that result from expanding organizational boundaries. Increased adaptive capability in turn corresponds to expansion of entrepreneurial activity, as firms increase their entrepreneurial orientation as the strategic mechanism to capitalize on their improved understanding of market conditions. We find support for our research model in a two‐study series conducted in South Korea and the United Kingdom. Managerial summary: Most would agree that entrepreneurially oriented firms—being innovative, entering new markets, and taking risk—grow faster. But how a firm becomes entrepreneurial is a complicated question. In this study, we flipped the growth relationship around and found support for growth contributing to a firm's entrepreneurial orientation. But between growth and being more entrepreneurial is the firm's ability to recognize changes in market expectations. We argue that as a firm grows, it acquires new resources and new knowledge of how to use those resources. These new resource combinations increase its ability to recognize changes in market expectations—its adaptive capability. This capability uncovers new entrepreneurial opportunities for value creation. To capture this potential value, firms expand their entrepreneurial orientation. Copyright © 2016 John Wiley & Sons, Ltd.     

企业间网络的效率边界:经济组织逻辑的重新审视

企业间网络是一种既不同于市场也不同于企业科层的组织形式，它是一些经过筛选的独立的企业通过正式契约和隐含契约所构成的互相依赖、同担风险的长期合作的交易模式。本文综合交易成本理论以及企业能力理论对影响企业网络边界的因素分别进行了阐释，对资产专用性、企业能力、不确定性等因素对企业边界的影响机制进行了分析。随着资产专用性的逐步提高，在其他条件不变的情况下，交易的治理机制逐步从市场过渡到企业网络，当资产专用性进一步提高时，企业科层将替代企业网络。当企业之间的能力是互补但不相似时，交易将通过企业网络来进行。同时，产品需求的不确定性也将导致企业间网络组织的出现。     

Do managerial ties in China always produce value? Competition,uncertainty, and domestic vs. foreign firms

While most advocate that foreign firms should utilize managerial ties to conduct business in China, recent literature cautions that such ties may offer only conditional value. This study examines three sources of heterogeneity that may condition the value of ties: firm ownership (foreign vs. domestic), competition, and structural uncertainty. Results from a survey of 280 firms in China indicate that though foreign and domestic firms utilize ties at a similar level, their performance gains from tie utilization differ. Managerial ties have a monotonic, positive effect on performance for domestic firms, whereas the effect is curvilinear (i.e., inverted U-shaped) for foreign firms. Therefore, compared with domestic firms, foreign firms have a competitive disadvantage from tie utilization. Furthermore, managerial ties are less effective for fostering performance when competition becomes more intense. However, ties lead to higher levels of firm performance when structural uncertainty increases. Overall, these results support the contingency view of managerial ties and caution companies about the unconditional use of ties as the market becomes more heterogeneous. Copyright © 2008 John Wiley & Sons, Ltd.     

Vertical Exclusion with Downstream Risk Aversion or Limited Liability

An upstream firm with full commitment bilaterally contracts with two ex ante identical downstream firms. Each observes its own cost shock, and faces uncertainty from its competitor’s shock. When they are risk neutral and can absorb losses, the upstream firm contracts symmetric outputs for production efficiency. However, when they are risk averse, competition requires the payment of a risk premium due to revenue uncertainty. Moreover, when they enjoy limited liability, competition requires the upstream firm to share additional surplus. To resolve these trade‐offs, the upstream firm offers exclusive contracts in many cases.     

Contingent Product Design and Marketing Strategies Influencing New Product Success and Failure in U.S. and Japanese Electronics Firms

The commercial success or failure of a product doesn't rest solely on the whims of the marketplace. The myriad, often interdependent, strategic trade-offs made throughout the product development process go a long way toward determining whether a product succeeds or fails. The key to success often rests in finding the right combination of product design and market choice decisions. Toward that end, William E. Souder and X. Michael Song examine the relationship between product success and several product design and market choice strategies. In particular, they explore the possibility that the correct strategy combination differs depending on a firm's perception of market uncertainty, which they measure in terms of the respondents' perceived familiarity with the market for a product, perceived understanding of customer needs, and perceived capability to translate those needs into product performance specifications. Recognizing that the correct combination of strategic choices may also depend on firm size, industry, and culture, the study focuses on small U.S. suppliers of electronics components. Fortune 500 producers of electronics final products, and Japanese producers of electronics final products. For the small U.S. firms in the study, an emphasis on performance superiority, technical superiority, or radically new products provides a recipe for failure under low market uncertainty. Even under high market uncertainty, these characteristics do not equate to success for the small U.S. firms in this study. The findings suggest that these firms should focus on design compatibility with a purchaser's installed base. The responses from Fortune 500 firms and Japanese companies indicate that under low market uncertainty these larger organizations should consider emphasizing compatibility and avoiding radical designs. For markets that the larger firms perceive to be highly uncertain, the results suggest that these companies should emphasize performance superiority, technical superiority, and radical designs. The findings related to market choice strategies also support the notion that the correct combination of strategic decisions depends on firm size, culture, and the perceived level of market uncertainty. However, the guidelines presented in this study should not be construed as hard-and-fast rules for formulating product strategy. Instead, the results presented here will be helpful for challenging assumptions and guiding actions, as one element in the effort to shape an effective product strategy.     

On the strategic value of risk management

This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where firms that are rendered “risk averse” by financial frictions decide on and commit to their hedging strategies before their product market strategies. We find that commitment to hedging modifies the pricing and production strategies of firms. This strategic effect is channeled through the risk-adjusted expected cost, i.e., the expected marginal cost under the probability measure induced by shareholders' “risk aversion”. It has opposite effects depending on the nature of product market competition: commitment to hedging toughens quantity competition while it softens price competition. Finally, not committing to the hedging position can never be an equilibrium outcome: committing is always a best response to non-committing. In the Hotelling model, committing is a dominant strategy for all firms.