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Investor Sentiment and Noise Traders: Discount to Net Asset Value in Listed Property Companies in the U.K

There are parallels between the operation of closed-end funds and in the United Kingdom property companies. In both types of corporations, the market capitalization is commonly less than the net asset value (NAV) of the assets owned by the firms. This article investigates the relationship between the NAV of U.K. property companies and their market capitalizations. We first examine the hypothesis that discounts are the result of agency costs, contingent capital gains tax liability and a number of other firm specific factors. We then examine the hypothesis that discounts result from the interaction of noise traders and rational investors. The evidence suggests that both hypotheses have utility in explaining property company discounts.

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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 18 (1999)
Issue (Month): 2 ()
Pages: 291-312

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Handle: RePEc:jre:issued:v:18:n:2:1999:p:291-312
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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  1. Shleifer, Andrei & Vishny, Robert W, 1990. "Equilibrium Short Horizons of Investors and Firms," American Economic Review, American Economic Association, vol. 80(2), pages 148-53, May.
  2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  3. Charles Lee & Andrei Shleifer & Richard Thaler, 1990. "Investor Sentiment and the Closed-End Fund Puzzle," NBER Working Papers 3465, National Bureau of Economic Research, Inc.
  4. Joseph Gyourko & Donald B. Keim, 1992. "What Does the Stock Market Tell Us About Real Estate Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 457-485.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
  7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  8. Joseph Gyourko & Donald B. Keim, . "What Does the Stock Market Tell Us About Real Estate Returns? (Revision of 18-91) (Reprint 030)," Rodney L. White Center for Financial Research Working Papers 11-92, Wharton School Rodney L. White Center for Financial Research.
  9. Richard Barkham, 1997. "The financial structure and ethos of property companies: an empirical analysis," Construction Management and Economics, Taylor & Francis Journals, vol. 15(5), pages 441-456.
  10. Liu, Crocker H & Mei, Jianping, 1992. "The Predictability of Returns on Equity REITs and Their Co-movement with Other Assets," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 401-18, December.
  11. George W. Gau, 1987. "Efficient Real Estate Markets: Paradox or Paradigm?†," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(2), pages 1-12.
  12. Dennis R. Capozza & Sohan Lee, 1996. "Portfolio Characteristics and Net Asset Values in REITs," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 520-26, April.
  13. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
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