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

Abstract

This paper explores the link between the composition of firms' capital holdings and stock returns. I develop a general equilibrium production economy where firms use two factors: Real estate capital and other capital. Investment is subject to asymmetric adjustment costs that make cutting the capital stock costlier than expanding it. Because real estate depreciates slowly, firms with high real estate holdings are more vulnerable to bad productivity shocks, and real estate investment is riskier than investment in other capital. In equilibrium, investors demand a premium to hold these firms. This prediction is supported empirically.

Local Risk, Local Factors, and Asset Prices

“…In this paper, we study the implications of local beta on the propagation of aggregate shocks to local real estate prices and examine how this mechanism affects firms' returns. We show that, in high beta areas, real estate holdings of firms magnify the effects of aggregate shocks and thus support the "risky real estate" argument of Tuzel (2010).…”

“…This leads to variation in the size of the subsamples after the return data are merged. 34 It is well known that some industries need and thus hold more real estate than others (Tuzel (2010)). Sorting firms based on industry RER helps reduce the measurement errors individual firms face.…”

“…Zhang (2016) explores heterogeneity of firms in terms of their human capital that can be replaced by machines, namely, routine-task labor, and finds that firms with a higher share of routine-task labor earn lower expected returns, since routinetask labor proxies for a hedging option for the firms. Tuzel (2010) studies the asset pricing implications of firms' real estate holdings, finding that firms that own more structures (real estate) are less flexible, hence riskier, and earn higher risk premia. In this paper, we study the implications of local beta on the propagation of aggregate shocks to local real estate prices and examine how this mechanism affects firms' returns.…”

Labor‐Technology Substitution: Implications for Asset Pricing

“…r Mach/Struct is the ratio of machinery and equipment at cost (FATE) to the productive structure at cost, which is the sum of buildings (FATB), capital leases (FATL), and land (FATP). See Tuzel (2010) for a discussion of productive structural capital.…”

The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium

“…The capital depreciation rate, , is set to 0.12, which corresponds to the average Bureau of Economic Analysis (BEA) depreciation rates for equipment and structures. The housing depreciation rate H , is set to 0.025 following Tuzel (2009). Following Kydland and Prescott (1982) and Hansen (1985), the capital share for the non-housing sector is set to = 0:36: For the residential investment sector, the value of the capital share in production is taken from a BEA study of gross product originating, by industry.…”