Economic Fundamentals, Capital Expenditures and Asset Dispositions

31 Pages Posted: 21 Sep 2017 Last revised: 7 Feb 2019

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Eva Steiner

Cornell SC Johnson College of Business

Date Written: January 8, 2019

Abstract

The real estate literature recognizes the real option to invest in capital expenditures (CAPEX) or sell a property but treats these options as independent. We show that these real options are interconnected. We provide empirical evidence that, consistent with the real option framework, CAPEX increases in income growth expectations but declines in their volatility; that CAPEX are partially capitalized into property market values; and that CAPEX significantly reduce the subsequent likelihood of sale. We also present evidence that, controlling for market timing, past property performance influences CAPEX but not disposition choices, consistent with a value-add investment strategy.

Keywords: Disposition effect, real assets, real options

JEL Classification: D9, G40, R33

Suggested Citation

Ambrose, Brent W. and Steiner, Eva Maria, Economic Fundamentals, Capital Expenditures and Asset Dispositions (January 8, 2019). Available at SSRN: https://ssrn.com/abstract=3040229 or http://dx.doi.org/10.2139/ssrn.3040229

Brent W. Ambrose

Pennsylvania State University ( email )

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

Eva Maria Steiner (Contact Author)

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

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