Financial Development and Asset Valuation: The Special Case of Real Estate

36 Pages Posted: 19 Feb 2009 Last revised: 3 May 2011

See all articles by Muhammed Shahid Ebrahim

Muhammed Shahid Ebrahim

Durham Business School

Sikandar Hussain

Nottingham University Business School

Date Written: July 25, 2008

Abstract

This paper investigates the impact of financial development on asset valuation. We model the agency theoretic perspective of risk averse investors and financiers in a general equilibrium framework using the principle of rational expectations. We focus on real estate, as it constitutes a special case of complete market contracting where adverse selection and moral hazard are easily mitigated. Our results illustrate an increase in pareto-efficiency, as financial architecture advances from (i) banks to capital markets; and (ii) plain vanilla debt to innovative one with participation clauses. This is attributed to the reduction in agency costs and cross-sectional risk-sharing, leading to an increase in the value of property. Our results predict that an optimal financial system will orient itself towards efficient financial contracts, irrespective of its source of origination. We also rationalize the co-existence of banks and capital markets, and generalize our results to the corporate sector of the economy under a set of restrictive conditions.

Keywords: Financial Deepening, Financial Innovation, Financial Liberalization, Risk Management

JEL Classification: D58, G12, G2, G32, O12, O16, R13

Suggested Citation

Ebrahim, Muhammed Shahid and Hussain, Sikandar, Financial Development and Asset Valuation: The Special Case of Real Estate (July 25, 2008). Nottingham University Business School Research Paper No. 2009-04. Available at SSRN: https://ssrn.com/abstract=1346362 or http://dx.doi.org/10.2139/ssrn.1346362

Muhammed Shahid Ebrahim (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Sikandar Hussain

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
255
Abstract Views
1,333
rank
121,852
PlumX Metrics