An Empirical Study on Relationship Between Real Estate Prices and the Value of Firms in Korea

Kiwoong Cheong and Chi Soo Kim
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Kiwoong Cheong: Keimyung University
Chi Soo Kim: Yeungnam University

Korean Economic Review, 1996, vol. 11, issue 2, 113-140

Abstract: This paper sets out to investigate the relationship between changes in real estate prices and the value of firms and presents some tentative conclusions based upon its empirical findings. The main hypothesis is that changes in the value of firms caused by expectations as to increasing real estate prices will be smaller in magnitude than these in the val-ue of their real estate holdings since there will be a loss in the value of the firm oc-casioned by the perception of future growth opportunities forgone. The secondary hypothesis is that the loss in value caused by growth opportunities forgone will be proportional to the amount of debt financing taken up. The empirical findings from a yearly cross-sectional test during 1987-91 are that the proportion of a firm's real estate holdings to its total assets had no significant effect on the return on investment in its stocks. However, the higher the debt ratio of the firm, the lower the coefficient of the real estate holdings, implying that the value loss of the growth opportunities forgone becomes larger, as the firm uses more debt. Also these results are not observed in size analysis. Accordingly, a debt effect is regarded to be rather clearer than a size effect in the impact on stock returns of the real estate holdings.

Date: 1996
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