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Real Estate Risk, Corporate Investment and Financing Choice

Author

Listed:
  • Xiaoying Deng

    (Shanghai University of Finance and Economics)

  • Seow Eng Ong

    (National University of Singapore)

  • Meijun Qian

    (Australian National University)

Abstract

This paper empirically examines how real estate risk impacts corporate investment and financing decisions. Using a panel of United States firms from 1985 to 2013, we document that real estate risk is negatively associated with firms’ long-term investments and long-term external financing in equity and debt. The results are robust to different risk measurements and in particular salient during the financial crisis period when the endogeneity between risk and investment is less of a concern. The effect on firm leverage, however, depends on risk measures. Overall, in contrast to previously documented positive effects of the real estate value, real estate risk exposure exhibits mostly the opposite effects on investment, financing and capital structure. This difference is consistent with option value determinants. Findings in this paper shed new lights on the impact of real estate holding on corporate decisions, offer a new explanation for the underperformance of hedge funds’ real estate strategies, and confirm the theoretical predictions in Deng et al. (2015).

Suggested Citation

  • Xiaoying Deng & Seow Eng Ong & Meijun Qian, 2018. "Real Estate Risk, Corporate Investment and Financing Choice," The Journal of Real Estate Finance and Economics, Springer, vol. 57(1), pages 87-113, July.
    • Handle: RePEc:kap:jrefec:v:57:y:2018:i:1:d:10.1007_s11146-017-9599-y
    DOI: 10.1007/s11146-017-9599-y
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    2. Lee, Hung-Wei & Lin, Che-Chun & Tsai, I-Chun, 2023. "Another application of call options: Explaining the divergence between the housing market and the rental market," Finance Research Letters, Elsevier, vol. 53(C).
    3. Arif Khan, Muhammad & Qin, Xuezhi & Jebran, Khalil, 2019. "Does uncertainty influence the leverage-investment association in Chinese firms?," Research in International Business and Finance, Elsevier, vol. 50(C), pages 134-152.
    4. Dongxue Wang & Yugang He, 2024. "The Mathematical Simulation of South Korea’s Financial and Economic Impacts from Real Estate Bubbles: Lessons from the China Evergrande Collapse," Mathematics, MDPI, vol. 12(19), pages 1-24, September.

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