In this study, we use functional magnetic resonance imaging (fMRI) to understand how homeowners process non-financial information when considering strategic mortgage default. We find that borrowers ...initially attempt to inhibit their knee-jerk reaction to retaliate against a lender who has engaged in egregious lending practices when compared to a financially conservative lender. Moreover, when defaults are rare, borrowers are less likely to default because violating the social norm results in feelings of disgust. Finally, when a lender refuses a loan modification, the borrower is found to seek retribution. Interestingly, granting even a modest loan modification removes the desire of homeowners to seek retribution towards their lender no matter what their impression of the lender may be. The results carry a number of policy implications.
Abstract
Recent theoretical work shows that the better-than-average effect, where a majority believes their ability to be better than average, can be perfectly consistent with Bayesian updating. ...However, later experiments that account for this theoretical advance still find behavior consistent with overconfidence. The literature notes that overoptimism can be caused by either overconfidence (optimism about performance), wishful thinking (optimism about outcomes), or both. To test whether the better-than-average effect might be explained by wishful thinking instead of overconfidence, we conduct an experiment that is similar to those used in the overconfidence literature, but removes performance as a potential channel. We find evidence that wishful thinking might explain overconfidence only among the most optimistic subjects and that conservatism is possibly more of a worry; if unaccounted for, overconfidence might be underestimated.
This study investigates the determinants of capital structure decisions by real estate firms, with a specific focus on the impact of political risk on leverage. Using a sample of Asia-Pacific REITs ...and listed property trusts, we find those firms with properties located in countries characterized by relatively high degrees of political risk, such as political instability, and/or greater uncertainty in the ability to repatriate and monetize profits from international investment activities, employ less debt than their counterparts operating in more politically stable environments. This core finding remains robust to alternative sample selection criteria including the division of the sample into high versus low market-to-book value firms, and also holds within the subset of organizations that are active in raising additional capital in the secondary markets.
Economic experiments are used to evaluate the impact of uncertainty on negotiations involving the assembly of land for real estate development. Consistent with the tenets of prospect theory, the ...results suggest landowners act to mitigate risk, as opposed to maximize gain, when the duration of negotiations are undefined and they face disadvantageous fallback positions in the event they do not reach an agreement to sell their properties. The experiments contribute to the study of behavioral economics by offering further evidence of psychological biases that can encourage individuals to act in ways that are inconsistent with neoclassical economic theory.
This study examines the determinants of real estate investment trust (REIT) capital structure decisions from 1990 to 2008. Using a broad sample of 2,409 firm‐year observations, we find that asset ...tangibility is positively related to leverage, whereas profitability and market‐to‐book ratios are negatively related. Additional evidence suggests that firm debt capacity varies systematically with the unique operating and financing mechanisms employed by REITs. These results are robust across both aggregate firm debt levels and marginal security issuance decisions. Finally, our results provide further insight into competing capital structure theories, generally supporting empirical predictions derived from the market timing and trade‐off theories, although failing to support pecking order theory predictions.
Using a sample of CCIM designees and candidates in an experimental setting, this study examines the impact of broker signaling in commercial real estate transactions. It also explores the effect of ...certainty of closure in commercial real estate transactions. Findings suggest brokers are able to influence transaction pricing. Moreover, detailed analysis reveals that when a signal is above a reference point implied by previous transactions, the strength of the signal matters; privately communicated signals from reliable sources have significantly greater impact than signals which are made widely available. Additionally, we find an approximately 10% premium in transactions with lower certainty of closure than one with high certainty. The latter result varies by transactional participant type; owner/developers require a larger premium than institutional sellers.
This paper investigates the influences of intrafirm geographic and cultural dispersion, the distance between the location of a firm’s investments and its headquarters, on the firm’s information ...environment. Specifically, using a sample of publicly traded real estate companies across the Asia-Pacific region, we examine how intrafirm geographic and cultural distance impacts a firm’s capital acquisition costs. As a consequence of both the heavily regulated operating environment faced by these firms, as well as the capital intensive nature of this industry, funding costs should be of pronounced importance to firms within this sector. Consistent with this paradigm, we find that firms with geographically disperse investments exhibit enhanced informational opacity. Specifically, firms with more geographically disperse investments exhibit higher capital acquisition costs than their more geographically concentrated counterparts. Similarly, firms with more culturally disparate investments also exhibit enhanced informational opacity, as evidenced by increased capital costs. Additionally, we present evidence that the impact of both physical and cultural distance is increasing following the global financial crisis. Taken together, our results provide strong evidence that both intrafirm geographic and cultural dispersion materially impact both an organization’s information environment and funding costs.
The influential work of Genesove and Mayer (2001) uses loss aversion theory to explain several puzzling behaviors in the housing market. In this paper, we present an alternative theory, which does ...not require an asymmetric value function to observe the same “loss aversion” behavior. Specifically, this paper presents a model in which a reference-dependent home seller has a symmetric value function, but faces an inter-temporal decision problem. Furthermore, the framework of the model also helps explain the positive price-volume relationship and price dispersion effect, two observations that are well-documented in the housing market.
This study uses bivariate dynamic conditional correlations (DCC) to analyze REITs' relation with stock and bond markets from 1999 to 2018. The results show that the daily DCCs of both Equity REIT and ...Mortgage REIT returns experienced several structural changes attributed to the state of the economy, levels of leverage, inclusion or exclusion of REITs from the major S&P indices, and REITs getting their own Global Industry Classification Standard (GICS) category. To account for the structural changes, we allow the impact of the macroeconomic driving forces of the DCCs to vary over time. First, we formulate an OLS model using dummy variables regression (DV) to indicate regime membership, using endogenous break-dates. Then, we estimate a Markov regime-switching model (MRS) that allows the impacts of macroeconomic variables to differ during high and low variance regimes. Both complementary regime-sensitive models (DV and MRG) exhibit significant improvement relative to a traditional OLS model. The findings have significant implications for portfolio and risk management. For example, we find that with the new GICS sector, Equity REIT returns decoupled from the Financial Sector and the overall market as measured by the SP 500. These types of correlation shifts can significantly alter optimal portfolio weights whether trying to maximize returns, minimize risk, or achieving the highest risk-adjusted returns.
Mimetic Herding Behavior and the Decision to Strategically Default Seiler, Michael J.; Lane, Mark A.; Harrison, David M.
Journal of real estate finance and economics/The Journal of real estate finance and economics,
11/2014, Letnik:
49, Številka:
4
Journal Article
Recenzirano
Odprti dostop
This study examines the herding behavior of individuals in the context of their willingness to strategically default on a mortgage based on the (falsely) observed behavior of those around them. We ...find that homeowners are easily persuaded to follow the herd and adopt a strategic default proclivity consistent with that of their peers. Herding behavior is stronger when a Maven, or thought leader, is involved and weaker when the person finds strategic default to be morally objectionable. Homeowners appear to herd more for informational gains rather than for social reasons, and do not herd differentially based on signal strength. In a robustness check using a sample of real estate professionals, the strong mimetic herding result continues to hold.
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