Publications
Hedging, Contract Enforceability and Competition (with Erasmo Giambona and Gordon M. Phillips)
Review of Financial Studies, 2025, 38(7), 2034-2087.
We study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. We examine firms after a staggered state-level reform that reduces the costs of hedging by granting derivatives superpriority in case of insolvency. We show that firms that are likely to face costly external finance increase hedging and reduce risk and the probability of receivership. Firms that are likely to face costly external finance, also lower prices, increase policy sales and increase their market share post reform.
Estimating Commercial Property Fundamentals from REIT data (with David Geltner and Alex M. Van de Minne)
Journal of Real Estate Finance and Economics, Forthcoming.
In this paper we propose a new methodology for the estimation of fundamental property asset-level investment time series performance and operating data based on real estate investment trusts (REITs). The methodology is particularly useful to develop publicly accessible operating statistics for investment real estate, such as income or expenses per square foot. Commercial property operating statistics are relatively under-studied from an investment perspective. We show how the methodology can be used to estimate the time series of property values, net operating income, cap rates, operating expenses and capital expenditures, per square foot of building area, by property type (sector) at the quarterly frequency for multiple specific geographic markets from 2004 through 2018. We show illustrative empirical results for Los Angeles offices and Atlanta apartments. The methodology allows estimation of actual quantity levels, not just dimensionless index numbers (longitudinal relative). It allows for an “additive” model structure that is more parsimonious, thereby addressing the need for granular market segmentation. We also introduce a Bayesian framework that allows the estimation of reliable time series even in small markets.
Stock Comovement and Financial Flexibility (with Teng Huang, Stefano Sacchetto, and Carles Vergara-Alert)
Journal of Financial & Quantitative Analysis, 2024, 59(3), 1141-1184.
We develop a dynamic model of corporate investment and financing, in which shocks to the value of collateralizable assets generate variation in firms’ debt capacity. We show that the degree of similarity among firms’ financial flexibility forecasts cross-sectional variation in return correlation. We test the implications of the model with firm-level data in two empirical analyses using i) an instrumental variable approach based on shocks to the value of collateralizable corporate assets and ii) the outbreak of the COVID-19 crisis as an event study. We find that firms in the same percentile of the cross-sectional distribution of financial flexibility have 62% higher correlation in stock-return residuals than firms 50 percentiles apart.
Is There Super-normal Profit in Real Estate Development? (with David Geltner and Alex M. Van de Minne)
Journal of Real Estate Research, 2023, 45(2), 160-187.
This paper explores the question of whether real estate development (RED) projects systematically present positive net present value (NPV) and therefore, provide super-normal profit. Such projects are the products of a business operation that governs the exercise of the real call option on development that is represented by developable land. We present a framework for considering super-normal profit in the RED industry, and then in light of that framework we examine RED projects produced by publicly-traded equity real estate investment trusts (REITs). We find strong evidence of positive correlation between REITs’ Tobin-Q ratios, indicative of positive NPV, and the ratio of development assets to total assets in the firm, controlling for other factors. The nature of the firm’s Tobin’s-Q metric is such that the implied added firm value is net of land cost and net of overhead and search costs associated with the RED business operation. While our findings do not prove a direction of causality between REITs’ RED activity and positive NPV, the robust positive correlation controlling for other factors raises interesting implications which are discussed in the paper.
The Effect of Real Estate Prices on Peer Firms (with Einar Cathrinus Kjenstad)
Real Estate Economics, 2022, 50(4), 1022-1053.
We investigate peer effects from corporate real estate. Shocks to real estate prices shift firms' debt capacity, which has a significant impact not only on firm investment but also on the investment of peer firms. This peer effect from corporate real estate is stronger when firms or their peers have more investment opportunities; financially constrained firms invest more out of their own price shocks, while the peer effect is stronger for unconstrained firms; and we find significant peer effects within groups of small and large firms, respectively. Firms finance additional investment from peer real estate shocks using cash reserves. Overall, we document a new channel through which real estate is an economically significant determinant of corporate investment.
Riskiness of Real Estate Development: A Perspective from Urban Economics & Option Value Theory (with David Geltner and Alex M. Van de Minne)
Real Estate Economics, 2020, 48(2), 406-445.
In this article, we define a new construct for urban economic and investment analysis, which revisits the conventional wisdom that investment in real estate development is riskier than investment in stabilized property assets. This new construct, referred as a “development asset value index” (DAVI), is a value index for newly developed properties (only) in a given geographical property market. It tracks longitudinal changes in the highest and best use (HBU) value of locations, and it reveals developer and landowner behavior taking advantage of the optionality inherent in land ownership. In particular, the DAVI reflects developers' use of flexibility in the exercise of the call option to (re)develop the property to any legal use and density. We empirically estimate a DAVI for commercial property (i.e., central locations) and compare it with a corresponding traditional transaction-price-based property asset price index (PAPI) corrected for depreciation. We believe that the difference primarily reflects the realized value of flexibility in land development. We find that the DAVIs display greater value growth and are smoother over time and less cyclical than their corresponding PAPIs for the same locations. This suggests that developers successfully use flexibility, and that development may be riskier than stabilized property investment due primarily only to leverage effects (construction costs). Practical implications are also discussed.
The Effect of Financial Flexibility on Payout Policy (with Carles Vergara-Alert)
Journal of Financial and Quantitative Analysis, 2020, 55(1), 263-289.
We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.
