The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data

Holland, A. Steven; Ott, Steven H.; Riddiough, Timothy J.

doi:10.2139/ssrn.157328

Cited by 39 publications

(46 citation statements)

References 37 publications

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“…However, the access that developers have to real estate capital, as measured by the growth of real estate loans provided by U.S. banks, appears to be a relatively stronger determinant of building construction. Finally, total volatility appears to be a negative determinant of completions, as would accord with the findings in the options literature, such as Holland, Ott and Riddiough (2002).…”

Section: Regression Resultssupporting

confidence: 84%

“…In recent years, there has been a series of papers that discusses the role of options pricing theory in the decision to build office space (Titman 1985, Grenadier 1995, Schwartz and Torous 2007, Holland, Ott and Riddiough 2002). One common theme of this work is that the value of the option to build depends on the level of building value uncertainty.…”

Section: Related Literaturementioning

confidence: 99%

“…In the vein of Holland, Ott and Riddiough (2002), a measure of “total uncertainty” (or uncertainty with respect to rent values) is created to test its effect on completions and height. As will be discussed later, because I do not have rent values, I use a proxy measure of economic activity that affects rents to look at how the standard deviation of this measure affects completions and height.…”

Section: Related Literaturementioning

confidence: 99%

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Skyscrapers and the Skyline: Manhattan, 1895-2004

Barr¹

2010

Real Estate Economics

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This article investigates the market for skyscrapers in Manhattan from 1895 to 2004. Clark and Kingston (1930) have argued that extreme height is a result of profit maximization, while Helsley and Strange (2008) posit that skyscraper height can be caused, in part, by strategic interaction among builders. I provide a model for the market for building height and the number of completions, which are functions of the market fundamentals and the desire of builders to stand out in the skyline. I test this model using time series data. I find that skyscraper completions and average heights over the 20th century are consistent with profit maximization; the desire to add extra height to stand out does not appear to be a systematic determinant of building height. Copyright (c) 2010 American Real Estate and Urban Economics Association.

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Section: Regression Resultssupporting

confidence: 84%

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

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Skyscrapers and the Skyline: Manhattan, 1895-2004

Barr¹

2010

Real Estate Economics

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“…In fact, this alleviates the typical joint‐hypothesis problem of optimal q theory that postulates a certain optimal q level and interprets any deviation from it as inefficient. Given that the REIT sector has been mostly in a growth stage since the 1990s and that real estate investment involves various option features due to its irreversibility (Holland, Ott and Riddiough 2000), a higher equity marginal q ratio can be interpreted as a sign of more efficient capital budgeting. We will also empirically verify this interpretation in the subsequent analysis.…”

Section: Equity Marginal Q Ratiomentioning

confidence: 99%

“…, not choosing to be private), and both are highly relevant for REITs. Regarding information, it is well documented that uncertainty plays an important role in real estate investment due to its irreversibility and delayability (Holland, Ott and Riddiough 2000). Hence, by resolving uncertainty, information generated outside the company can help REIT managers improve capital budgeting decisions.…”

Section: Firm‐level Analysis Of Equity Marginal Q Ratiomentioning

confidence: 99%

REIT Capital Budgeting and Equity Marginal q

Ambrose¹,

Lee²

2009

Real Estate Economics

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Equity marginal q is the change in the market value of a company's equity in response to a one-unit unexpected change in its asset base. Hence, it is a profitability index that evaluates a firm's capital budgeting decisions at the margin. We estimate the equity marginal q for real estate-managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class. Using the universe of equity REITs for the period from 1993 to 2005, we find that REITs with greater idiosyncratic volatility, higher stock turnover and smaller bid-ask spread have a higher equity marginal q. In addition, both the holdings of institutional investors and their investment horizons are respectively positively related to equity marginal q. With these firm characteristics taken into account, firm size is found to be negatively related to equity marginal q. Our findings are economically important as well, because the equity marginal q ratio alone accounts for approximately one-third of the total REIT shareholder wealth change during the study period.

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The value of flexibility in multi‐business firms

Dickler

Folta

Santaló

et al. 2022

Strategic Management Journal

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Research Summary Whether diversified firms have advantages over their single‐business counterparts is the focus of much research in strategic management. Indeed, there is sparse evidence that corporate advantage exists, on average. We explore one potential driver of corporate advantage—that multi‐business firms have more flexibility than single‐business firms to cope with uncertainty, because they can internally redeploy resources across businesses. Using Compustat data, we show that uncertainty increases the relative advantage of multi‐business firms, a finding robust to controls for endogeneity. Consequently, the paper provides important insight and evidence around when corporate advantage might obtain. Moreover, we find that growth option value is accentuated in the presence of switching flexibility. Finally, multi‐business firms with redeployment experience and businesses with more inversely correlated returns benefit more from uncertainty. Managerial Summary Multi‐business firms have a flexibility advantage over single‐business firms as they can reallocate firm resources from one business unit to another depending on inducements. What is the impact of this flexibility on firm value? In this paper, we test whether such a flexibility advantage translates into greater economic returns in more volatile markets. We expect that resource redeployment creates value if it amplifies business‐specific positive shocks while alleviating business‐specific downturns. Consistent with this argument, we find empirical evidence that with increasing stock market volatility, multi‐business firms benefit significantly more in terms of firm value than their single‐business counterparts. In particular, in highly volatile stock markets, monthly adjusted returns are 2.3 times higher for multi‐business firms than for single‐business firms.

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The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data

Cited by 39 publications

References 37 publications

Skyscrapers and the Skyline: Manhattan, 1895-2004

Skyscrapers and the Skyline: Manhattan, 1895-2004

REIT Capital Budgeting and Equity Marginal q

The value of flexibility in multi‐business firms

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