Corporate Real Estate Holdings and the Value of the Firm in Korea

This study investigates the relationship between changes in real estate prices and the value of firms. The main hypothesis is that changes in the value of firms caused by expectations of increasing real estate prices will be smaller in magnitude than these in the value of their real estate holdings since there will be a loss in the value of the firm occasioned 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 used. The findings using a yearly cross-sectional test during 1987–91 indicate that the proportion of a firm’s real estate holdings to its total assets had no significant effect upon 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 clearer than a size effect in the impact upon stock returns of the real estate holdings.