Product Market Characteristics, Capital Asset Irreversibility, and Corporate Asset Allocation: Theory and Evidence(2/2)

Project Details

Description

Empirical literature shows that U.S. corporations tend to “buy high and sell low” when it comes to commercial real estate transactions, and explains that American firs tend to acquire (dispose) real estate properties during the economic expansion (downturn), implying a motive of asset reallocation. As in the corporate finance field there exists no analytical models can be used to investigate corporate asset allocation, the purpose of this research project is to examine this important issue by integrating the production-based CAPM by Cochrane (1991), and the consumption-based CAPM by Grossman and Laroque (1990), so as to discuss how asset and product market characteristic affect corporate asset allocations – especially on real estate holdings – with a theoretical model and corresponding statistical analysis.In the first year under the proposal, I assume the firm has a goal similar to Cochrane which assumes a firm chooses production quantity and amount of capital investment so as to maximize the profit of the firm. I will replace the representative consumer in Grossman and Laroque with a representative firm, and then extend the two assets in their paper so that the firm considers investing in three assets: risky/riskless assets and a durable good. I will also follow Dixit (1991) to assume that the firm faces a constant-elasticity demand function, has a Cobb-Douglas production function, and the evolution of prices for the risky asset and the durable good follow a geometric Brownian motion, respectively. As the firm in my model maximizes its value while employing an optimal quantity of production at each instant, the long-run equilibrium in my model is then mean-variance efficient, similar to Grossman and Laroque. Under a simplified assumption that the firm does not face uncertainty nor incur sunk costs when purchasing capital, it will allocate more value on the durable good (including its real estate holdings) but with a decreasing speed when the firm either faces more competitive pressure or uses capital more intensively. In the second year under the proposal, I aim to statistically test if the derivations in my theoretical model are supported by using empirical data. I plan to us the panel data of the U. S. firms listed on the NYSE, AMEX, and NASDAQ exchanges during the period from 1987 to 2016. I plan to employ stock market data drawn from publicly available web sites such as the Wall Street Journals to obtain the trend and volatility data of the risky assets. For calculating the real estate holdings and other control variables of public companies, I plan to use data drawn from Compustat and CRSP data bases. For accessing the prices and other features of commercial real estate transitions, I plan to employ CoStar COMPs® and Properties® databases. For the econometric analysis I will use (1) the OLS method to run regressions with corporate fixed assets holdings as the dependent variable; and (2) both ordered probit and multinomial logit methods to run regressions with a dependent variable which indicates the purchase, inactive, and dispose of real estates of a firm.
StatusActive
Effective start/end date1/08/2031/07/22

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 11 - Sustainable Cities and Communities
  • SDG 12 - Responsible Consumption and Production
  • SDG 17 - Partnerships for the Goals

Keywords

  • Capital goods
  • transaction costs
  • corporate real estate allocation
  • irreversibility
  • competitive pressure
  • capital intensity

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