Corporate Real Estate Holdings and the Cross Section of Stock Returns

36 Pages Posted: 18 Mar 2005 Last revised: 2 Sep 2009

See all articles by Selale Tuzel

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department

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Date Written: August 31, 2009

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. I find that the returns of firms with a high share of real estate capital compared to other firms in their industry exceed that of low real estate firms by 3-6% annually, adjusted for exposures to the market return, size, value, and momentum factors. Moreover, conditional beta estimates reveal that these firms indeed have higher market betas, and the spread between the betas of high and low real estate firms is countercyclical.

Keywords: Asset Pricing, Real Estate, Cross Section of Returns, Capital Heterogeneity

JEL Classification: D21, D92, E22, E44, G12, R33

Suggested Citation

Tuzel, Selale, Corporate Real Estate Holdings and the Cross Section of Stock Returns (August 31, 2009). Available at SSRN: https://ssrn.com/abstract=685642 or http://dx.doi.org/10.2139/ssrn.685642

Selale Tuzel (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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