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Corporate Real Estate Holdings and the Cross-Section of Stock Returns

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  • Selale Tuzel
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    Abstract

    This article explores the link between the composition of firms' capital and stock returns. I develop a general equilibrium production economy where firms use two factors: real estate and other capital. Investment is subject to asymmetric adjustment costs. Because real estate depreciates slowly, firms with high real estate holdings are more vulnerable to bad productivity shocks and hence are riskier and have higher expected returns. This prediction is supported empirically. I find that the returns of firms with a high share of real estate capital exceed that of low real estate firms by 3--6% annually, adjusted for exposures to the market return, size, value, and momentum factors. Moreover, conditional beta estimates reveal that these firms indeed have higher market betas, and the spread between the betas of high and low real estate firms is countercyclical. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhq006
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 6 (June)
    Pages: 2268-2302

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    Handle: RePEc:oup:rfinst:v:23:y:2010:i:6:p:2268-2302

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    Cited by:
    1. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
    2. Jack Favilukis & Xiaoji Lin, 2011. "Micro Frictions, Asset Pricing and Aggregate," FMG Discussion Papers dp673, Financial Markets Group.
    3. Frederico Belo & Xiaoji Lin & Maria Ana Vitorino, 2014. "Brand Capital and Firm Value," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 150-169, January.
    4. Jermann, Urban J., 2013. "A production-based model for the term structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 293-306.
    5. Jones, Christopher S. & Tuzel, Selale, 2013. "Inventory investment and the cost of capital," Journal of Financial Economics, Elsevier, vol. 107(3), pages 557-579.
    6. Xiaoji Lin & Jack Favilukis, 2011. "Micro Frictions, Asset Pricing, and Aggregate Implications," 2011 Meeting Papers 466, Society for Economic Dynamics.
    7. Norden, Lars & van Kampen, Stefan, 2013. "Corporate leverage and the collateral channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5062-5072.
    8. Hongyan Du & Yongkai Ma, 2012. "Corporate Real Estate, Capital Structure and Stock Performance: Evidence from China," International Real Estate Review, Asian Real Estate Society, vol. 15(1), pages 107-126.

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