We study the diversification benefits of REIT preferred and common stock using a utility-based framework in which investors segment based on risk aversion. We examine optimal mean-variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish three main results. First, REIT common stock helps low risk aversion investors attain portfolios with higher returns, while REIT preferred stock helps high risk aversion investors by providing a venue for risk reduction. Second, REIT preferred stock has a risk-return profile not easily replicated by other asset classes. Finally, conclusions drawn from the empirical analysis are markedly different under these constraints compared to the classical unconstrained setting.

This study examines the actual environmental performance compared to the eco-certification label for office buildings with respect to the behavior of tenants and landlords. Using several recently available databases on individual tenant leases, tenant profiles, building-level environmental performance and building characteristics, we are able to assess which type of tenants are willing to pay a premium for occupying green space and also the incremental rent premium associated with a “named” green label in contrast to prior studies. We find that tenants have the ability to distinguish actual environmental performance from eco-certification; i.e., separating the wheat from the chaff. JEL Classification Numbers: G12; L11; M14; R32; R33.

The purpose of this paper is to study mergers and acquisitions activity in the insurance industry in a comprehensive data set covering thirty years of transactions. Several results are found in the study. First, it is found that privately held takeover targets command lower valuations in takeovers than publicly traded firms. For example, the ratios of Deal Value to Sales, Price to EPS, and Deal Value to EBITDA are all lower for privately held targets than public targets. On average, the valuation multiples are 45% lower for private acquisition targets relative to public firms. Second, the paper studies the effect of the business cycle – recessions and expansions – on valuation. The discount of private targets relative to public targets is present at all stages of the business cycle, both in expansions and in recessions. The private discount, however, is less severe during recessions than non-recessions. Jointly, these results suggest that recessions have an important impact on the market for corporate control.

Substantial public subsidies, and even outright public ownership, of hotels have become common in the United States as communities target tourism as an integral economic development tool. A critical question that is increasingly being raised about the public sector entering the hotel business is, are these government-funded facilities unfair competition to properties developed by the private sector? The common reply to these concerns is that the publicly owned hotel is critical to growing demand for lodging accommodation and that once it opens, the new hotel will attract enough new business that all hotels will benefit. We use an event study to test this hypothesis across all of the 100% publicly developed hotels for which there are sufficient data to conduct the analysis. In looking at these 21 hotels, we found strong evidence that the performance of neighboring hotels worsens after the introduction of a publicly owned hotel.

The literature links extreme events to changes in risk aversion but fails to find a consensus on the direction of this change. Due to data limitation the speed of the change in risk aversion is never analyzed. This paper overcomes this limitation on basis of an original methodology. To elicit changes in attitude toward risk, we rely on the daily market price of a lottery bond issued by Belgium. We provide evidence on the dynamic of risk preferences just before, during and just after the Second World War. Risk attitudes varied substantially between 1939 and 1947. Risk aversion increased at the outbreak of the war, then decreased dramatically during the occupation to increase again after the war. To our knowledge, this reversal in risk attitude is unique in the literature. We discuss several potential explanations to this pattern, namely changes in economic perspectives, mood, prospect theory, and background risk. While they might all have played a role, we argue that habituation to background risk most consistently explains the observed behavior over the whole period. Living continuously exposed to the war-related risks gradually changed the risk-taking behavior of investors.

This study examines the effect of cost of living (COL) on employee wages in the hotel industry. Although prior research clearly indicates that COL and wages are positively related, there is a lack of research explicitly considering the specific nature of the relationship between COL and wages, and potential moderators to the relationship. Using a dataset containing information on 97 jobs over 67 cities, our study shows that while there is a positive effect of COL on wages, the adjustment is not equal in magnitude to the difference that the COL levels would indicate. Furthermore, the effect of COL decreases as the average wage for the given job increases. We also show differences in COL’s effects for full-service versus limited-service hotels. We illustrate the implications of our findings by showing predicted wage rates for four jobs in five different cities, at both full-service and limit-service hotels. The study has implications for research, particularly for future work on COL and compensation. The findings also have important implications for practice, and may be particularly useful when managers need to set pay levels when local market data are unavailable.

In this paper we use a sample of individual trading accounts in equity style funds taken from one fund family to test the hypothesis that trading styles are inherent vs. contextual. Our sample contains investors who invest either in a growth fund, a value fund or both. We document behavioral differences between growth fund investors and value fund investors. We find that their trades depend on past returns in different ways: growth fund investors tend towards momentum trading and value fund investors tend towards contrarian trading. These differences may be due to inherent clientele characteristics, including beliefs about market prices, specific personality traits and cognitive strategies that cause them to self-select into one or the other style. We use a sample of investors that trade in both types of funds to test this proposition. Consistent with the contextual hypothesis, we find that investors who hold both types of funds trade growth fund shares differently than value fund shares.

In a prior report, A New Canary for Hotel Mortgage Market Distress, we introduced the loan spread as a new metric for forecasting a change in relative delinquency levels for hotels. In this report, we take a look under the hood to see what are the catalysts that drive the hotel credit spread e.g., make our canary sing or croak. For lenders, the higher the perceived risk, the higher the required return (interest rate). If all property types have similar risk, then the interest rate among property types should also be similar. However, the interest rate for hotels exceeds other property types especially office buildings. This implies that hotel loans are riskier than loans for office buildings. In this report, we examine the catalysts or drivers of hotel credit spreads. The credit spread is the difference between the interest rate on hotel loans and the interest rate on office loans. This credit spread is also known as the relative risk premium or risk premium differential. Using a Vector Autoregression (VAR) statistical framework, which allows for the mutual impact of interdependent economic time series, we find that there are several catalysts of hotel credit spreads (relative risk premium). Our study spans a variety of economic conditions including expansions and contractions which is important because it allows us to subsume a variety of economic events. Hotel credit spreads widen in the face of the following events: a worsening in the general economy, a decline in anticipated corporate profitability, a decrease in capital availability, a decrease in hotel revenues, and an increase in relative risk. These variables thus capture risk and return information embedded in the risk premium differential (spread). The relative risk premium reflects risk and is systematically priced.

This paper investigates the loan pricing of risk in a market with short term leases (hotels) relative to longer term leases (office properties) with respect to how news on the economy, capital and real estate markets is incorporated in loan pricing using a vector autoregression (VAR) framework. The hotel loan pricing data provides a unique laboratory to study loan pricing adjustments given the short-term nature of the hotel leases. We examine the information content of hotel credit spreads in two stages. After establishing the impact of economic variables on loan pricing and the informational content of the incremental risk spread, we next examine how loan pricing adjusts in response to expected delinquencies. We find that improvement in general economic conditions, an increase in forward looking corporate profitability, an increase in capital availability and/or an increase in the demand for hotel services forecast a decline in the hotel risk premium differential. Thus, the relative loan prices—the spread—reflect systematic risk. We also find that hotel spreads themselves contain important economic information. Unexpected increases in hotel spreads predict hotel delinquencies. In other words, lenders appear to set interest rates on hotel mortgages in anticipation of hotel delinquencies and foreclosures in future periods. Lenders do not appear to consider past delinquencies in their setting their rate.

In this paper we study priming of identity within the context of inherent vs. contextual financial decision making. We use a sample of individual trading accounts in equity-style funds taken from one fund family to test the hypothesis that trading styles are inherent vs. contextual. Our sample contains investors who invest either in a growth fund, a value fund, or both. We document behavioral differences between growth fund investors and value fund investors. We find that their trades depend on past returns in different ways: growth fund investors tend towards momentum trading and value fund investors tend towards contrarian trading. These differences may be due to inherent clientele characteristics, including beliefs about market prices, specific personality traits and cognitive strategies that cause them to self-select into one or the other style. We use a sample of investors that trade in both types of funds to test this proposition. Consistent with the contextual hypothesis, we find that investors who hold both types of funds trade growth fund shares differently than value fund shares.

Lenders’ evaluation of the hotel industry’s prospects can be assessed using a metric called the relative risk premium, which we introduce in this report. Similar to the canary in a coal mine, changes in the relative rates that lenders charge for hotel loans, as compared to those for office buildings, give an early warning of relative hotel loan delinquencies. This metric is based on the practice of lenders charging higher interest rates for hotel loans than on office buildings. The relative risk premium measure is defined as the interest rate on hotels minus interest rate on office buildings. Changes in this measure predict relative hotel loan delinquencies (delinquencies on hotel loans minus delinquencies on office building loans). Office loans are an appropriate benchmark to measure the relative health of hotel loans because office building occupancy has a relationship with the economy and with room-night demand. Spreads on hotel loans widen when lenders anticipate higher hotel delinquencies relative to offices and narrow during periods when relative delinquencies for hotels are expected to drop. We also find three other bellwethers for hotel delinquencies: an increase in the volatility of hotel REIT returns (risk), a negative shock to expected earnings forecasts (which signals lower expected future profitability), or an increase in unemployment. Interestingly, the converse situation doesn’t hold, and an increase in relative delinquencies is not useful in predicting a rise in the relative risk premium.

We use a vector autoregression framework to investigate loan pricing in a market with short-term leases (hotels) relative to longer-term leases (office properties), studying how news on the economy and capital markets are incorporated into the relative pricing of risk. We examine the impact of economic variables on the incremental risk premium and establish its informational content. Relative loan prices reflect systematic risk: an improvement in the general economy, an increase in forward looking corporate profitability, an increase in capital availability, and an increase in industry demand forecast a decline in the risk premium differential. We then examine how loan pricing adjusts to expected delinquencies. The spreads themselves contain important economic information and can help forecast delinquencies. Lenders are forward-looking in the pricing of risk and appear to set interest rates in anticipation of future delinquencies.

Using vector autoregression technique, we examine the interrelation between venture capital flows, economic development, capital market fund-raising activities, and capital market valuation, based on annual data of the United States over the past half-century. We find that venture capital commitments appear to be correlated with GDP and capital market valuation. While capital market fund-raising activities (Initial Public Offerings and Seasoned Equity Offerings) are also correlated with venture capital flows, these effects are subsumed by GDP, indicating that the overall economy drives both venture capital flows and capital market financing activities. Analyses from impulse response functions suggest that shocks to GDP have a permanent effect on venture capital flows, while the impact of capital market valuation (Standard & Poor 500 returns) on venture capital flows is rather short lived. Overall, both economy-wide development and financial market fluctuations seem to impact venture capital flows.

An interesting, important, and challenging financial question both in academic research and in practice is how to determine asset managers’ investment performance. That is, how much can be attributed to luck or serendipitous timing and how much is skill? In this paper we demonstrate how return-based style analysis, known as attribution analysis, can be used to ascertain the extent to which managers of REITs add value to their firm’s stock returns. Developed by William F. Sharpe, a Nobel Laureate, the attribution analysis technique was originally used to analyze a manager’s investment style based on the individual’s equity portfolio (e.g., large cap growth versus large cap value) by comparing returns on various indices.1 The manager’s style would be inferred according to the extent to which a weighted combination of indices most closely replicated the actual performance of the manager’s portfolio over a specified time period. In this way, a fund manager’s style is determined by finding the mix of indices that provides returns that are the most similar to the manager’s portfolio’s returns. The manager’s performance can then be assessed from the resulting benchmark portfolio, which is constructed using the various indices. The unmanaged benchmark reflects how an investor would do if he or she owned a portfolio comprising the same indices but didn’t have the manager.

An analysis of seven years of monthly charge-card sales and tip data from a multi-regional restaurant chain in the United States found that tip percentages predicted food sales in the following month. Thus, restaurant executives, managers, and owners are encouraged to add tip percentages to their sales forecasting models.

We study the relationship between the risk preferences of individuals and the risk preferences of the aggregate economy. To emphasize the vast differences that can occur between individual and market preferences brought about through aggregation, we assume an economy consisting entirely of risk seekers. We show that such individuals can lead to an aggregate economy that is risk averse. The converse is also true. An aggregate economy that exhibits risk aversion does not imply an economy of individual risk averters. An economy demanding a risk premium can be formed from individuals who do not demand such compensation. Understanding the relationship between the preferences of individuals and the preferences of the aggregate economy is crucial for understanding the connection between the behavioral finance literature, which focuses on individual preferences, and the asset-pricing literature, which focuses on aggregate prices. We discuss empirical implications of these results. This paper was accepted by Wei Xiong, finance.