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

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Moussa Diop

University of Southern California

Jiro Yoshida

Pennsylvania State University - Smeal College of Business; The University of Tokyo - Graduate School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2015

Abstract

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

Ambrose, Brent W. and Diop, Moussa and Yoshida, Jiro, Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty (November 25, 2015). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2448532 or http://dx.doi.org/10.2139/ssrn.2448532

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Moussa Diop

University of Southern California ( email )

Sol Price School of Public Policy
RGL 315
Los Angeles, CA 90089
United States
(213)821-0467 (Phone)

Jiro Yoshida (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

368 Business Building
Smeal College of Business
University Park, PA 16802
United States
814-865-0392 (Phone)
814-865-6284 (Fax)

HOME PAGE: http://www.personal.psu.edu/juy18

The University of Tokyo - Graduate School of Economics ( email )

7-3-1 Hongo
Bunkyo-ku, Tokyo 113-0033
Japan
813-5841-5653 (Phone)
813-5841-5521 (Fax)

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