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Focus, Transparency and Value: The REIT Evidence

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Author Info
Dennis R. Capozza
Paul J. Seguin

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Abstract

We trace the effects of corporate focus by examining the relationships among focus, cash flows and firm value. In contrast to past studies that examine the effects of diversifying across SIC-code-defined industries, we show that diversification, even within a single industry, reduces value. Our evidence, drawn from a panel of real estate investment trusts, indicates that this reduction is not due to poor managerial performance. Project-level cash flows are actually higher for less focused firms. However, these gains are offset by higher management, administrative and interest expenses. Thus, the corporate cash flows available to shareholders are not related to focus. Finally, we provide empirical evidence that links the effect of focus on value to informational asymmetries which cause the equity of diversified firms to be less liquid. We attribute some of the effect of focus on the cost of both debt and equity to informational asymmetries or transparency costs. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00785
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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 27 (1999)
Issue (Month): 4 ()
Pages: 587-619
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Handle: RePEc:bla:reesec:v:27:y:1999:i:4:p:587-619

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1080-8620

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  1. Owen Lamont & Christopher Polk, 1999. "The Diversification Discount: Cash Flows vs. Returns," NBER Working Papers 7396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Han, Bing, 2004. "Insider Ownership and Corporate Value: Evidences from Real Estate Investment Trust," Working Paper Series 2004-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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