IDEAS home Printed from https://ideas.repec.org/a/kap/jrefec/v51y2015i2p125-159.html
   My bibliography  Save this article

Leverage and Returns: A Cross-Country Analysis of Public Real Estate Markets

Author

Listed:
  • Emanuela Giacomini

    ()

  • David Ling

    ()

  • Andy Naranjo

    ()

Abstract

The theoretical literature suggests a positive relation between financial leverage and asset returns, but the empirical evidence on this effect is mixed. We examine leverage effects in public real estate markets across eight countries with active public real estate markets. Cross-country public real estate markets provide an interesting testing ground given the significant use of leverage in real estate markets, the variation in REIT capital structures within and across countries, and the cross-country differences in liquidity, ownership, economic, institutional, and capital market structures. After carefully isolating leverage effects in firm-level returns, we find that leverage has a significant effect on returns both unconditionally and conditionally using standard asset pricing models. In addition, greater use of leverage during the 2007–2008 REIT crisis period is associated with larger share price declines. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Emanuela Giacomini & David Ling & Andy Naranjo, 2015. "Leverage and Returns: A Cross-Country Analysis of Public Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 125-159, August.
  • Handle: RePEc:kap:jrefec:v:51:y:2015:i:2:p:125-159
    DOI: 10.1007/s11146-014-9489-5
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11146-014-9489-5
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Ling, David C & Naranjo, Andy, 1997. "Economic Risk Factors and Commercial Real Estate Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 283-307, May.
    3. Capozza, Dennis R & Seguin, Paul J, 2000. "Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 91-116, March.
    4. John Gallo & Ying Zhang, 2010. "Global Property Market Diversification," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 458-485, November.
    5. Brounen, Dirk & Kok, Nils & Ling, David C., 2012. "Shareholder composition, share turnover, and returns in volatile markets: The case of international REITs," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1867-1889.
    6. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    7. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    8. Jamie Alcock & Eva Steiner & Kelvin Tan, 2014. "Joint Leverage and Maturity Choices in Real Estate Firms: The Role of the REIT Status," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 57-78, January.
    9. Steven A. Sharpe, 2002. "Reexamining Stock Valuation and Inflation: The Implications Of Analysts' Earnings Forecasts," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 632-648, November.
    10. Joao F. Gomes & Lukas Schmid, 2010. "Levered Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 467-494, April.
    11. Allen, Marcus T & Madura, Jeff & Springer, Thomas M, 2000. "REIT Characteristics and the Sensitivity of REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 21(2), pages 141-152, September.
    12. William G. Hardin III & Zhonghua Wu, 2010. "Banking Relationships and REIT Capital Structure," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(2), pages 257-284, June.
    13. Arthur Korteweg, 2010. "The Net Benefits to Leverage," Journal of Finance, American Finance Association, vol. 65(6), pages 2137-2170, December.
    14. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-528, June.
    15. Zhilan Feng & Chinmoy Ghosh & C. Sirmans, 2007. "On the Capital Structure of Real Estate Investment Trusts (REITs)," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 81-105, January.
    16. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
    17. Ling, David C & Naranjo, Andy, 2002. "Commercial Real Estate Return Performance: A Cross-Country Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 119-142, Jan.-Marc.
    18. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    19. Brian A. Marts & Fayez A. Elayan, 1990. "Capital Structure and the Cost of Capital for Untaxed Firms: The Case of REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(1), pages 22-39, March.
    20. Ping Cheng & Stephen E. Roulac, 2007. "REIT Characteristics and Predictability," International Real Estate Review, Asian Real Estate Society, vol. 10(2), pages 23-41.
    21. Shaun A. Bond & G. Andrew Karolyi & Anthony B. Sanders, 2003. "International Real Estate Returns: A Multifactor, Multicountry Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 481-500, September.
    22. Howe, John S & Shilling, James D, 1988. " Capital Structure Theory and REIT Security Offerings," Journal of Finance, American Finance Association, vol. 43(4), pages 983-993, September.
    23. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
    24. George, Thomas J. & Hwang, Chuan-Yang, 2010. "A resolution of the distress risk and leverage puzzles in the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 96(1), pages 56-79, April.
    25. Filippo Ippolito & Roberto Steri & Claudio Tebaldi, 2011. "The Relative Leverage Premium," Working Papers 398, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    26. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    27. Roselyne Joyeux & George Milunovich, 2015. "Speculative bubbles, financial crises and convergence in global real estate investment trusts," Applied Economics, Taylor & Francis Journals, vol. 47(27), pages 2878-2898, June.
    28. Martin Hoesli & Kustrim Reka, 2013. "Volatility Spillovers, Comovements and Contagion in Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 1-35, July.
    29. Nafeesa Yunus, 2009. "Increasing Convergence Between U.S. and International Securitized Property Markets: Evidence Based on Cointegration Tests," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(3), pages 383-411, September.
    30. Erasmo Giambona & John P. Harding & C.F. Sirmans, 2008. "Explaining the Variation in REIT Capital Structure: The Role of Asset Liquidation Value," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(1), pages 111-137, March.
    31. David M. Harrison & Christine A. Panasian & Michael J. Seiler, 2011. "Further Evidence on the Capital Structure of REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(1), pages 133-166, March.
    32. Robert M. Hull, 1999. "Leverage Ratios, Industry Norms, and Stock Price Reaction: An Empirical Investigation of Stock-for-Debt Transactions," Financial Management, Financial Management Association, vol. 28(2), Summer.
    33. David T. Brown & Timothy J. Riddiough, 2003. "Financing Choice and Liability Structure of Real Estate Investment Trusts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 313-346, September.
    34. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    35. Andy C. W. Chui & Sheridan Titman & K. C. John Wei, 2003. "The Cross Section of Expected REIT Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 451-479, September.
    36. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    37. Mukesh K. Chaudhry & Suneel Maheshwari & James R. Webb, 2004. "REITs and Idiosyncratic Risk," Journal of Real Estate Research, American Real Estate Society, vol. 26(2), pages 207-222.
    38. Stephen H. Penman & Scott A. Richardson & İrem Tuna, 2007. "The Book‐to‐Price Effect in Stock Returns: Accounting for Leverage," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 427-467, May.
    39. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
    40. Walter I. Boudry & Jarl G. Kallberg & Crocker H. Liu, 2010. "An Analysis of REIT Security Issuance Decisions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(1), pages 91-120, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefan Nagel & Amiyatosh Purnanandam, 2019. "Bank Risk Dynamics and Distance to Default," NBER Working Papers 25807, National Bureau of Economic Research, Inc.
    2. repec:eee:corfin:v:51:y:2018:i:c:p:109-124 is not listed on IDEAS
    3. repec:bla:reesec:v:46:y:2018:i:1:p:210-250 is not listed on IDEAS
    4. repec:kap:jrefec:v:59:y:2019:i:2:d:10.1007_s11146-018-9687-7 is not listed on IDEAS
    5. repec:bla:abacus:v:53:y:2017:i:3:p:319-348 is not listed on IDEAS
    6. repec:kap:jrefec:v:57:y:2018:i:1:d:10.1007_s11146-016-9562-3 is not listed on IDEAS
    7. repec:taf:jpropr:v:36:y:2019:i:1:p:27-58 is not listed on IDEAS

    More about this item

    Keywords

    Asset returns; Leverage; REITs; Cross-country real estate returns; Financial constraints; Crisis; G110; G120; G150; G320; G01;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrefec:v:51:y:2015:i:2:p:125-159. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.