Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty
Real Estate Economics, Forthcoming
75 Pages Posted: 12 Jun 2014 Last revised: 3 Dec 2015
Date Written: November 25, 2015
This paper theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition, and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.
Keywords: strategic investment, entry deterrence, real options, flexibility, firm risk
JEL Classification: G31, L13, R33
Suggested Citation: Suggested Citation