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Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study

45 Pages Posted: 9 Mar 2016 Last revised: 30 Aug 2017

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); University of Aberdeen - Business School; Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute

Stanimira Milcheva

University College London

Alex Moss

University of Reading - Henley Business School; City University London - Sir John Cass Business School

Date Written: February 29, 2016

Abstract

This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector; the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool; the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily stock returns of real estate companies and identify the regulatory events through news published in major international financial newspapers and news agencies. Our results show different responses across the three regulations. For Basel III we find support for the regulatory burden hypothesis of the bank lending channel for small real estate firms and firms with low debt-to-equity ratios as they cannot diversify their funding sources. The direct regulatory effect as tested using AIFMD announcements supports the profit-based reaction hypothesis for large firms. We also show that the news have asymmetric effects with tighter regulation news more frequently leading to significant responses in average abnormal returns (AARs) than loosening regulation news

Keywords: Financial market regulation, Basel III, AIFMD, EMIR, event study, listed property companies, CAPM

JEL Classification: G14, G28, R30

Suggested Citation

Hoesli, Martin and Milcheva, Stanimira and Moss, Alex, Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study (February 29, 2016). Swiss Finance Institute Research Paper No. 16-20. Available at SSRN: https://ssrn.com/abstract=2743730 or http://dx.doi.org/10.2139/ssrn.2743730

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute ( email )

24 rue du Général-Dufour
Geneva, CH - 1211
Switzerland

University of Geneva - Geneva Finance Research Institute ( email )

Geneva
Switzerland

Stanimira Milcheva (Contact Author)

University College London ( email )

1-19 Torrington Place
Department of Construction and Project Management
London, London WC1E 7HB
United Kingdom

Alex Moss

University of Reading - Henley Business School ( email )

Greenlands
Reading, Henley on Thames RG6 6AH
United Kingdom

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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