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Debt financing and real estate investment timing decisions

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  • Giovanni Marseguerra
  • Flavia Cortelezzi

Abstract

The paper analyses the interaction between investment and financing decisions in a real option framework. In our model, the owner of an undeveloped real estate property (the asset in place) has the option to decide whether and when to develop/abandon his property. We show that debt financing induces the firm to invest earlier than in the pure equity financing case. Moreover, the incentive to anticipate the investment decisions increases with the amount of debt.

Suggested Citation

  • Giovanni Marseguerra & Flavia Cortelezzi, 2009. "Debt financing and real estate investment timing decisions," Journal of Property Research, Taylor & Francis Journals, vol. 26(3), pages 193-212, June.
    • Handle: RePEc:taf:jpropr:v:26:y:2009:i:3:p:193-212
    DOI: 10.1080/09599911003669625
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    References listed on IDEAS

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    1. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
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    8. Quigg, Laura, 1993. "Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    9. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
    10. Marseguerra, Giovanni & Cortelezzi, Flavia & Dominioni, Armando, 2006. "Investment timing decisions in a stochastic duopoly model," Chaos, Solitons & Fractals, Elsevier, vol. 29(3), pages 611-625.
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    Cited by:

    1. Seung Dong You, 2014. "The Leveraged City," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 1042-1066, December.
    2. Daniela Bragoli & Flavia Cortelezzi & Pierpaolo Giannoccolo & Giovanni Marseguerra, 2020. "R&D Investment timing, default and capital structure," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 779-801, April.
    3. Jianfu Shen & Frederik Pretorius & K. W. Chau, 2018. "Land Auctions with Budget Constraints," The Journal of Real Estate Finance and Economics, Springer, vol. 56(3), pages 443-471, April.

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