SHA Working Papers

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Customer Concentration and Cost Structure
Chang, Hsihui; Hall, Curtis M.; Paz, Michael (2017-04-01)
This study examines the effects of customer concentration levels on firm cost structure decisions. Analyzing cost data from a sample of manufacturing firms from 1976 through 2013, we find a negative relationship between customer concentration and cost elasticity whereby firms exhibit lower proportions of variable-to-fixed costs in the presence of higher levels of customer concentration. Additionally, we find that greater customer bargaining power, proxied by supplier industry competition and product market fluidity, leads to lower cost elasticity as customer concentration becomes greater. These results are robust to alternate specifications as well as controlling for endogeneity using a two-stage model. Our results suggest that suppliers respond to customer concentration by pursuing increased mutual dependence and cooperation with customers rather than attempting to reduce the effect of power imbalances within the supplier-customer relationship.
Farm Mechanization and Rural Migration in the Great Depression
Boone, Christopher; Wilse-Samson, Laurence (2019-01-14)
We study sectoral labor realloaction in the U.S. during the Great Depression by examining transitions between the farm and nonfarm sectors as well as movement within the farm sector. Towns and cities that are hit harder by the downturn see higher levels of out-migration to farms, suggesting that the widespread movement to farms serves as a source of migratory insurance. We also show that the more mechanized farming areas are far less able to provide this insurance function. In fact, while the subsistence agricultural sector gains large numbers of people during the crisis, the mechanized agricultural sector sheds workers. Instead of being released into more productive occupations, many of the workers leaving these mechanized areas are themselves moving into low-productivity or subsistence farming. This evidence suggests that economic downturns can interrupt the process of structural transformation and that the job losses associated with structural change may exacerbate the employment problem during economic downturns.
The Rate of Return on Real Estate: Long-Run Micro-Level Evidence
Chambers, David; Spaenjers, Christian; Steiner, Eva (2019-06-01)
We provide evidence that direct real estate investments are less profitable and more risky in the long run than previously thought. We hand-collect property-level data on realized income, expenses, and transaction prices from the archives of four large institutional investors in the U.K.—historically important Oxbridge colleges—for the period 1901–1970. Gross income yields mostly fluctuate around 5%, but trend to lower (higher) levels for agricultural and residential (commercial) real estate near the end of our sample period. Operating costs mean that net yields are about one third lower than gross yields on average. Long-term real income growth rates are between -1.0% and 0.0% for the three main property types. Together these findings imply limited long-run capital gains and real annualized net total returns of less than 4% across all property types. Moreover, we find substantial volatility in net income streams and variation in relative price levels across transacted properties, revealing the considerable idiosyncratic risks associated with real estate investments.
Where, When and How Do Sophisticated Investor Respond to Flood Risk?
Eichholtz, Piet M. A.; Steiner, Eva; Yönder, Erkan (2019-06-01)
While the empirical evidence on the pricing of flood risk exposure in residential real estate held by uninformed households is mixed, this study shows that sophisticated investors in commercial real estate markets rationally respond to heightened flood risk by bidding down the prices of exposed assets. Using a detailed property-level database on commercial real estate transactions completed in New York, Boston, and Chicago before and after the shift in the salience of flood risk caused by Hurricane Sandy, we document that properties exposed to flood risk experience slower price appreciation after the storm than equivalent unexposed properties. We further show that: the price effect is not driven by physical damage incurred from Hurricane Sandy, nor by concurrent unrelated pricing trends for waterfront property; it persists through time, suggesting it does not reflect a temporary overreaction that is subsequently reversed; it is driven by higher risk premiums for exposed properties; and it is exacerbated by contagion from locally important occupiers.
Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America
Mao, Yifei; Wang, Jessie Jiaxu (2018-03-18)
This paper establishes labor scarcity as an important economic channel through which access to finance shapes technological innovation. We exploit antebellum America, a unique setting with (1) staggered passage of free banking laws across states and (2) sharp differences in labor scarcity between slave and free states. We find that greater access to finance spurred technological innovation as measured by patenting activities, especially in free states where labor was relatively scarce. Interestingly, in slave states where slave labor was prevalent, access to finance encouraged technological innovation that substituted for free labor, but discouraged technological innovation that substituted for slave labor.
Financial Globalization and Risk Sharing: Welfare Effects and the Optimality of Open Markets
Trzcinka, Charles A.; Ukhov, Andrey D. (2006-01-01)
To study the welfare effects of investment barriers and the opening of markets to foreigners, we construct an equilibrium model of international asset pricing without agency costs that allows endogenous market participation among heterogeneous agents. Equilibrium prices and the set of participating and non-participating agents are jointly determined in equilibrium and the ability of agents to choose to participate in the market affects prices of domestic and foreign assets. We examine the welfare effects of non-participation and find that when a country moves from complete segmentation to open markets for foreigners, the cost of capital falls in the domestic market. This is consistent with empirical findings in the international asset pricing literature. Through the endogenous participation mechanism, our model is able to capture sources of economic growth. Contrary to previous models, however, we show that opening markets is not Pareto-optimal and we identify a class of domestic agents whose welfare is lower after the opening of markets. These finding have political economy interpretations and policy implications.
Preferences Toward Risk and Asset Prices: Evidence From Russian Lottery Bonds
Ukhov, Andrey D. (2005-11-03)
This paper studies the relationship between investor risk preferences and asset returns. The paper provides direct evidence on the risk aversion of participants in a securities market. It uses the prices of lottery bonds issued by the Imperial Russian Government in 1864 and 1866 to estimate investor risk aversion and to study changes in preferences toward risk. Time variation in investor risk preferences is then compared to the dynamics of the Russian bond market over the period 1889 to 1904. Increases in risk aversion are positively associated with increases in the price of a risk-free asset. This result is in accord with economic intuition that higher risk aversion is associated with higher demand for a safe asset, and hence, higher equilibrium price of a risk-free security and a lower risk-free rate. Implications of a Consumption CAPM model for a relationship between changes in interest rates and changes of risk aversion are tested. Evidence supporting the model is found. The paper provides evidence on the role of risk aversion in securities market dynamics.
Learning to Become a Taste Expert
LaTour, Kathryn A.; Deighton, John (2018-06-01)
Evidence suggests that consumers seek to become more expert about hedonic products to enhance their enjoyment of future consumption occasions. Current approaches to becoming expert center on cultivating an analytic mindset. In the present research the authors explore the benefit to enthusiasts of moving beyond analytics to cultivate a holistic style of processing. In the taste context the authors define holistic processing as non-verbal, imagery-based, and involving narrative processing. The authors conduct qualitative interviews with taste experts (Master Sommeliers) to operationalize the holistic approach to hedonic learning, and then test it against traditional analytic methods in a series of experiments across a range of hedonic products. The results suggest that hedonic learning follows a sequence of stages whose order matters, and that the holistic stage is facilitated by attending to experience as a narrative event and by employing visual imagery. The results of this multi-method investigation have implications for both managers and academics interested in how consumers learn to become expert in hedonic product categories.
What Really Happens During Flight to Safety: Evidence from Real Estate Markets
Boudry, Walter I.; Connolly, Robert A.; Steiner, Eva (2018-05-15)
Flight to safety (FTS) affects the markets for risky assets such as stocks, corporate bonds, and commodities. Yet, little is known about the effects on commercial real estate. We show that REITs offer a partial hedge against FTS, with daily total returns being less sensitive to FTS than many other industries and measures of REIT liquidity actually improving on FTS days. However, a cluster of FTS days signals a decline in economic fundamentals in the long run. We find that the odds of a drop in REIT quarterly revenue increase by 15% after an FTS cluster, ceteris paribus. This effect persists for up to four quarters. We also find that commercial real estate price appreciation is all but wiped out over up to four quarters following an FTS cluster. Our findings benefit investors by providing estimates of the short-term return and liquidity response of REITs to FTS episodes, and by documenting long-term effects on REIT revenues and real asset values.
The Real Effects of Sharing Economy: Evidence from Airbnb
Mao, Yifei; Tian, Xuan; Ye, Kailei (2018-03-01)
Sharing economy has developed rapidly in recent years, but little is known regarding its real effects. This paper examines how a pioneer of sharing economy—Airbnb—affects local economy. Using venture capital infusions as plausibly exogenous shocks to Airbnb’s expansion into a new county, we find that Airbnb expansion leads to poorer hotel performance in the local county. Meanwhile, Airbnb expansion appears to reduce unemployment rate and increase household income. Further analysis suggests that increased employment is concentrated in industries that are complementary to Airbnb’s business and in employee groups with lower education levels. Our study sheds new light on the real effects of the sharing economy and provides important policy implications for policymakers.
Financial Innovation and Russian Government Debt Before 1918
Ukhov, Andrey D. (2003-05-05)
In this paper I describe debt instruments issued by the Russian Imperial Government. At the beginning of the 20th century, the Russian government was the largest borrower in the world. Russian government bonds were traded in all major financial centers, including London, Paris, Amsterdam, and New York. Russia was integrated into the world financial system. In 1913 foreign investors held 49.7% of Russian government debt. Innovative financial instruments were developed to attract foreign and domestic investors.
Evaluating Stock Price Volatility: The Case of REITs
Kallberg, Jarl; Liu, Crocker H.; Srinivasan, Anand (1998-03-15)
One of the most controversial topics in modem financial economics is "excess volatility:" the notion that stock prices move too much to be explained by fundamental economic and firm-specific factors. This article measures the degree of excess volatility in a special class of equities: real estate investment trusts (REITs). The structure of REITs, specifically, the constraints on dividend payout, the passive approach to asset management and the detailed data available on REIT composition, make them ideal for this investigation. The tests are conducted using the Shiller-West variance bounds methodology and by estimating the volatility of the underlying assets. We find that despite the absence of dividend smoothing behavior, REITs exhibit approximately the same level of excess volatility as determined in previous work in equities. This finding of excess volatility is confirmed in the second part of our analysis and confirms that dividend smoothing cannot explain excess volatility. Furthermore, it suggests that prices of securitized real estate vehicles like REITs follow a stochastic process that is very different from the process driving the underlying real assets.
The Real Estate Market in the Aftermath of September 11
Kallberg, Jarl; Liu, Crocker H.; Pasquariello, Paolo (2004-06-01)
This study examines the reaction of the financial markets to the terrorist attack on the World Trade Center and how their behavior compared to the subsequent resolution in the corresponding real asset markets. This event provides an ideal setting to evaluate the accuracy of the market’s reaction to external shocks since, unlike almost all studies of economic events, this tragedy was certainly unanticipated and thus absent from pre-existing market expectations, its overall impact was unclear, and the subsequent week of market closure gave market participants sufficient time to sort out the complex impact of the event on market prices. Our analysis of Real Estate Investment Trusts (REITs) with New York office exposure outside of the downtown area shows that, during the period of market closure and the first trading day, the equity market did not accurately anticipate how this event would impact office REITs. Specifically, we find that REITs with significant exposure to the New York market showed significant gains relative to REITs without New York exposure (an average difference of 4.057% of market value from the close on September 10 to the opening on September 17), and that this abnormal return disappeared only in November 2001. However, an examination of the underlying real asset market’s performance over the first few months after September 11 shows that New York properties significantly under-performed similar office properties in the U.S. This evidence provides little support for the notion that financial markets can rapidly and correctly price significant shocks to the underlying economy.
Individual Investors and the Financial Crisis
Liu, Crocker H.; Wang, Na (2014-01-01)
This paper studies the trading behavior of individual Chinese investors before and during the recent financial crisis. We have three major findings: (i) individual investors did not withdraw their capital from the equity market during the crisis; instead, they reduced investment more in the pre-crisis period, especially following portfolio gains; (ii) the net flow decisions were influenced by past positive returns, but not by past losses; the net flow patterns were consistent with the disposition effect, which was even stronger during the crisis; (iii) during the crisis, investors revised their portfolios to hold relatively safer and more liquid stocks, and this pattern is more evident for small investors.
Where Are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance
Liu, Crocker H.; Yermack, David (2007-10-17)
We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor’s 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO’s liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption.
Is There Excess Comovement in the U.S. Real Estate Markets
Kallberg, Jarl; Liu, Crocker H.; Pasquariello, Paolo (2007-09-14)
This study addresses the recent performance of the U.S. residential real estate market. We investigate the comovement among Case-Shiller Home Price Indices for 14 metropolitan areas from January 1987 to October 2006. We identify the portion of this comovement deemed as excessive, which we define as the covariation that cannot be attributed to common fundamental factors (i.e., factors that directly influence real estate prices). We find that the degree of observed raw comovement in these markets increased over the sample period, most significantly so in the late 1990s, but that this increase is largely due to systemic shocks; the degree of excess comovement is a less important factor. Further analysis indicates that the dynamics of observed raw comovement among metropolitan U.S. residential real estate markets is mostly attributable to underlying systematic real and financial shocks. We conclude that contagion played only a minor role in the evolution of U.S real estate prices over the last two decades.
Portfolio Allocations to Real Estate: Another Story
Corgel, John B.; deRoos, Jan A. (1994-12-01)
Almost 25 years ago Friedman (1970) demonstrated that unsecuritized real estate, because of its relatively high risk-adjusted return and low correlations with stocks and bonds, receives substantial allocations in efficient, mixed-asset portfolios. Fisher and Sirmans (1994) argue that these attractive features of real estate still exist today. In recent empirical work by Mei and Lee (1994), the presence of a unique real estate factor is detected in securitized and unsecuritized real estate returns that cannot be captured by investing in other assets.
Analysis of Senior-Subordinated Structures Backed by Private-Label Mortgages
Kallberg, Jarl; Liu, Crocker H.; Radhakrishnan, A. R. (1997-12-23)
This paper does a valuation analysis of senior-subordinated struc ture tranches backed by non-agency mortgages. The valuation is done using Monte Carlo simulation and employs the CIR interest rate process in conjunction with an empirical model estimated for non-agency mortgage prepayments and defaults. The sensitivity of the value of tranches to a number of variables are analyzed. We find that the interest rate process parameters significantly affect prepayments and defaults but not the relative value of the senior tranche. It is found that with the shifting o f prepayments, the senior tranche does not dominate all the junior tranches at all interest rates. The shifting of prepayments has the unintended effect of providing stability to the junior tranches by making their cashflows less sensitive to prepayments. Our main conclusion is that while the shifting o f prepayments increases protection from default to the senior tranche for a given level of subordination, it has the unwanted effect of lowering its value through increased contraction risk. This value loss should be taken into account in determining the optimum level of subordination.
Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility Based Framework
Boudry, Walter I.; deRoos, Jan A.; Ukhov, Andrey D. (2014-09-10)
We study the diversification benefits of REIT preferred and common stock using a utility based framework in which investors segment based on risk aversion. Taking the view of a long run investor, we conduct our analysis using data from 1992 to 2012. We examine optimal mean-variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish two main results. First, REIT preferred and common stock provides significant diversification benefits to investors. 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. Both asset classes receive material allocations over plausible levels of risk aversion. Second, while REIT preferred stock appears to behave somewhat like a hybrid debt/equity asset, its risk/return profile appears to not easily be replicated by those asset classes. When given the opportunity, investors will reduce allocations to REIT common stock and investment grade bonds and invest in REIT preferred stock.
A Forward-Looking Factor Model for Volatility: Estimation and Implications for Predicting Disasters
Kadan, Ohad; Liu, Fang Ph.D; Tang, Xiaoxiao (2017-10-01)
We show that any factor structure for stock returns can be naturally translated into a factor structure for return volatility. We use this structure to propose a methodology for estimating forward-looking variances and covariances of both factors and individual assets from option prices at a high frequency. We implement the model empirically and show that our forward-looking volatility estimates provide useful predictions of rare disasters for both factors and individual stocks.

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