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

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.

[1]  K. Geert Rouwenhorst,et al.  Asset Pricing Implications of Equilibrium Business Cycle Models , 1995 .

[2]  Michael Woodford,et al.  Plant-Level Adjustment and Aggregate Investment Dynamics , 1995 .

[3]  Albert Marcet,et al.  Parameterized expectations approach; Some practical issues , 1998 .

[4]  Toni M. Whited.  Debt, liquidity constraints, and corporate investment: evidence from panel data , 1992 .

[5]  François Gourio.  Operating Leverage, Stock Market Cyclicality, and the Cross-Section of Returns , 2005 .

[6]  Per Krusell,et al.  Income and Wealth Heterogeneity in the Macroeconomy , 1998, Journal of Political Economy.

[7]  Owen A. Lamont.  Investment Plans and Stock Returns , 1999 .

[8]  Stephen D. Oliner,et al.  Improved estimates of fixed reproducible tangible wealth, 1929-95 , 1997 .

[9]  Austan Goolsbee,et al.  Estimating Adjustment Costs with Data on Heterogeneous Capital Goods , 1997 .

[10]  Lawrence J. Christiano,et al.  Algorithms for solving dynamic models with occasionally binding constraints , 1997 .

[11]  Albert Marcet,et al.  Communication, commitment, and growth , 1992 .

[12]  Stijn Van Nieuwerburgh,et al.  A Theory of Housing Collateral, Consumption Insurance and Risk Premia , 2004 .

[13]  Cornelia Kullmann.  Real Estate and its Role in Asset Pricing , 2001 .

[14]  Daniel E. Sichel,et al.  Measuring Capital in the New Economy , 2005 .

[15]  F. Schiantarelli,et al.  Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities , 2003, Review of Economics and Statistics.

[16]  D. Comin,et al.  Diverging Trends in Aggregate and Firm Volatility , 2006, The Review of Economics and Statistics.

[17]  Charlotta Groth.  Quantifying UK Capital Adjustment Costs , 2008 .

[18]  V. Gala.  Investment and Returns , 2005 .

[19]  P. Samuelson.  Parable and Realism in Capital Theory: The Surrogate Production Function , 1962 .

[20]  C. S. Jones,et al.  Inventory Investment and the Cost of Capital , 2012 .

[21]  Edward C. Prescott,et al.  Economic Growth and Business Cycles , 2020, Frontiers of Business Cycle Research.

[22]  Stijn Van Nieuwerburgh,et al.  Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective , 2003 .

[23]  Bronwyn H Hall,et al.  The Manufacturing Sector Master File: 1959-1987 , 1990 .

[24]  Albert Marcet,et al.  Solving the Stochastic Growth Model by Parameterizing Expectations , 1990 .

[25]  103 Real Estate Ownership by Non-Real Estate Firms: The Impact on Firm Returns , 1999 .

[26]  Robert S. Chirinko.  Multiple capital inputs, Q, and investment spending , 1993 .

[27]  Andrea L. Eisfeldt,et al.  Capital Reallocation and Liquidity , 2006 .

[28]  Finn E. Kydland,et al.  Time to Build and Aggregate Fluctuations , 1982 .

[29]  Xiaoji Lin,et al.  Micro Frictions, Asset Pricing and Aggregate , 2011 .

[30]  Ilan Cooper,et al.  Asset Pricing Implications of Non-Convex Adjustment Costs and Irreversibility of Investment , 2003 .

[31]  Martin Schneider,et al.  Housing, Consumption, and Asset Pricing , 2006 .

[32]  Xiaoji Lin,et al.  Micro Frictions, Asset Pricing, and Aggregate Implications , 2011 .

[33]  Andrew Scott,et al.  Computational Methods for the Study of Dynamic Economies , 1998 .

[34]  Stijn van Nieuwerburgh,et al.  Housing Collateral, Consumption Insurance and Risk Premia , 2002 .

[35]  John H. Cochrane,et al.  A Cross-Sectional Test of an Investment-Based Asset Pricing Model , 1996, Journal of Political Economy.

[36]  G. Bertola.  Adjustment costs and dynamic factor demands : investment and employment under uncertainty , 1988 .

[37]  Jay Shanken.  On the Estimation of Beta-Pricing Models , 1992 .

[38]  Janice C. Eberly,et al.  A Unified Model of Investment Under Uncertainty , 1993 .

[39]  I. Jaccard.  Asset Pricing and Housing Supply in a Production Economy , 2011, SSRN Electronic Journal.

[40]  Matthew S. Dey,et al.  Taxation, investment, and firm growth with heterogeneous capital , 1998 .

[41]  Owner-Occupied Housing and the Composition of the Household Portfolio , 2002 .

[42]  Myron B. Slovin,et al.  Corporate Sale-and-Leasebacks and Shareholder Wealth , 1990 .

[43]  M. Braun.  Financial Contractability and Asset Hardness , 2005 .

[44]  Urban Jermann,et al.  NBER WORKING PAPER SERIES THE EQUITY PREMIUM IMPLIED BY PRODUCTION , 2006 .

[45]  Janice C. Eberly,et al.  Optimal Investment with Costly Reversibility , 1995 .

[46]  Larry G. Epstein.  Aggregating Quasi-Fixed Factors , 1983 .

[47]  Paul Gomme,et al.  Theory, Measurement, and Calibration of Macroeconomic Models , 2005 .

[48]  M. Denny,et al.  Homotheticity and Real Value-Added in Canadian Manufacturing , 1978 .

[49]  Jason G. Cummins.  A New Approach to the Valuation of Intangible Capital , 2003 .

[50]  Bronwyn H. Hall,et al.  The Stock Market's Valuation of R&D Investment during the 1980's , 1993 .

[51]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[52]  Toni M. Whited,et al.  The Effect of Uncertainty on Investment: Some Stylized Facts , 1995 .

[53]  Valerie A. Ramey,et al.  Displaced Capital: A Study of Aerospace Plant Closings , 2001, Journal of Political Economy.

[54]  R. Hall.  The Stock Market and Capital Accumulation , 1999 .

[55]  Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective , 2004 .

[56]  D. Wildasin,et al.  The q Theory of Investment with Many Capital Goods , 1984 .

[57]  The Equity Premium Implied by Production , 2006 .

[58]  A. Atkeson,et al.  Modeling and Measuring Organization Capital , 2005, Journal of Political Economy.

[59]  Barbara M. Fraumeni,et al.  The Measurement of Depreciation in the U.S. National Income and Product Accounts , 1997 .

[60]  Leonid Kogan,et al.  Asset prices and real investment , 2004 .

[61]  R. Green,et al.  Optimal Investment, Growth Options, and Security Returns , 1998 .

[62]  Mark E. Doms,et al.  Capital Adjustment Patterns in Manufacturing Plants , 1998 .

[63]  Lu Zhang,et al.  Equilibrium Cross Section of Returns , 2002, Journal of Political Economy.

[64]  R. Mehra,et al.  The equity premium and the allocation of income risk , 1992 .

[65]  Fumio Hayashi,et al.  The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms , 1990 .

[66]  Thomas F. Cooley.  Frontiers of business cycle research , 1995 .

[67]  Michele Boldrin,et al.  Habit Persistence, Asset Returns, and the Business Cycle , 2001 .

[68]  Stavros Panageas.  Technological Growth , Asset Pricing , and Consumption Risk , 2006 .

[69]  Jay Shanken,et al.  Intertemporal asset pricing: An Empirical Investigation , 1990 .

[70]  Lu Zhang,et al.  The Value Premium , 2002 .

[71]  I. Welch,et al.  A Comprehensive Look at the Empirical Performance of Equity Premium Prediction II , 2004, SSRN Electronic Journal.

[72]  P. Garegnani,et al.  Heterogeneous Capital, the Production Function and the Theory of Distribution , 1970 .

[73]  Andrea L. Eisfeldt,et al.  Leasing, Ability to Repossess, and Debt Capacity , 2009 .

[74]  Russell Cooper,et al.  On the Nature of Capital Adjustment Costs , 2000 .

[75]  Stavros Panageas,et al.  Technological Growth, Asset Pricing, and Consumption Risk over Long Horizons , 2006 .

[76]  M. Lettau,et al.  Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying , 1999 .

[77]  Urban Jermann.  Asset pricing in production economies , 1998 .

[78]  Janice C. Eberly,et al.  The Effects of Irreversibility and Uncertainty on Capital Accumulation , 1999 .

[79]  Yuhang Xing,et al.  Sector Investment Growth Rates and the Cross Section of Equity Returns , 2006 .

[80]  Clifford W. Smith,et al.  Determinants of Corporate Leasing Policy , 1985 .

[81]  John H. Cochrane,et al.  Explaining the Poor Performance of Consumption-Based Asset Pricing Models , 1999 .

[82]  Janice C. Eberly,et al.  Investment and q with Fixed Costs: An Empirical Analysis , 2001 .

[83]  R. Stambaugh,et al.  On the exclusion of assets from tests of the two-parameter model: A sensitivity analysis , 1982 .

[84]  A. Dixit.  Entry and Exit Decisions under Uncertainty , 1989, Journal of Political Economy.

[85]  C. Blackorby,et al.  Aggregating Heterogeneous Capital Goods in Adjustment-cost Technologies , 1983 .

[86]  Eduardo S. Schwartz,et al.  Investment Under Uncertainty. , 1994 .

[87]  Wayne E. Ferson,et al.  Measuring Fund Strategy and Performance in Changing Economic Conditions , 1996 .

[88]  Lu Zhang,et al.  Is Value Riskier than Growth? , 2003 .

[89]  Yongkai Ma,et al.  Corporate Real Estate, Capital Structure and Stock Performance: Evidence from China , 2012 .

[90]  J. Cochrane.  Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations , 1991 .