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Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty
Author(s) -
Ambrose Brent W.,
Diop Moussa,
Yoshida Jiro
Publication year - 2016
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.12150
Subject(s) - real estate , capitalization rate , economics , product market , lease , competition (biology) , corporate real estate , profit (economics) , microeconomics , investment (military) , cost approach , industrial organization , real estate development , real estate investment trust , business , financial economics , finance , ecology , politics , political science , law , biology , incentive
This article theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.