There is no place like home: Information asymmetries, local asset concentration, and portfolio returns

Abstract

Using a unique setting with significant cross‐market information asymmetries and a large sample of individual commercial property holdings, we provide robust evidence showing that local information plays a significant role in the linkage between local asset concentrations and return outperformance. We further document a significant positive relation between local asset concentration and portfolio returns in markets where information asymmetry is most severe. Two novel identification strategies that exploit a local lender's ability to price the local investor's information advantage and exogenous variation in sales price disclosure laws across states confirm an information‐based effect that is distinct from risk‐based or behavioral explanations.

Location density, systematic risk, and cap rates: Evidence from REITs

“…In contrast, we suggest a simple rationale for why properties in different locations may have different betas, and provide evidence consistent with that conjecture. Thus, our work contributes to the growing literature on property location characteristics and associated real estate investment performance (see Feng & Wu, 2021;Ling et al, 2021;Ling et al, 2021aLing et al, , 2021bWang & Zhou, 2020). However, to our knowledge, we are the first to focus on the relationships between zip code-level location density and commercial real estate investment outcomes.…”

Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?

“…More recent literature shows that there is an information advantage to being local. Ling et al (2018b) document that managers tend to overweight asset allocations to their local market to exploit their perceived information advantage. There is a significant positive relation between home market concentration and firm returns.…”

“…Market participants often choose local investment to reduce information asymmetry in opaque information environments (Garmaise & Moskowitz, 2004). Ling et al (2018b) also show that managers overweight asset allocations to their local market. Therefore, the distance of properties to the headquarters can be a relevant instrument.…”

“…As a result, investors perceive REITs with geographically diversified portfolios to be less prone to those local market shocks and so do not demand a return premium. Prior literature on diversification has tried to understand the benefits/costs of diversification from management costs (Capozza & Seguin, 1998;Capozza & Seguin, 1999;Hartzell et al, 2014), information asymmetry (Ling et al, 2018b), investor recognition (Garcia & Norli, 2012) and management alignment (Wang et al, 2017). We add to this literature in showing that diversification affects firms' returns by reducing the perceived risks of equity holdings.…”

“…Some literature focuses on the 'quality' of the location, including exposure to the so-called 'Gateway' markets (Ling et al, 2018a), the risk-adjusted property market portfolio returns (Ling et al, 2020a), and locational characteristics such as density and locational economic risks (Fisher et al, 2020). Other literature investigates the distance of properties from firm headquarters (Ling et al, 2018b;Milcheva et al, 2021). Spatial econometric modelling has also been used to quantify the impact of the locational factors (Zhu & Milcheva, 2020).…”