Information Asymmetries, Financial Constraints and Institutional Investment: Evidence from the Real Estate Market
41 Pages Posted: 24 Oct 2019
Date Written: October 15, 2019
In this paper we analyze the underlying economic mechanisms that might be driving the observed patterns in commercial real estate prices, as an interplay between buyer and seller characteristics (in terms of their size, capital constraints and market knowledge), and the timing and geographical location of these transactions. By jointly modelling the institutional investors' decision to invest in a particular real estate market and the effect of such decision on real estate prices and probability of sale, we find that, controlling for property-, and time-varying location specific-, as well as investor characteristics: largest buyers (sellers) tend to pay (sell for) a price premium for the otherwise identical property at the time of purchase (sale), relative to smallest buyers (sellers). Keeping investor size and investor financing constraints constant, more informed sellers tend to sell at a premium, while more informed buyers tend to buy at a discount. Furthermore, more informed sellers (buyers) are more likely to sell (buy), providing support to the argument that reduction in information asymmetry has a positive effect on asset liquidity. These results point to a significant role of private valuations and investor market informedness in commercial real estate markets, when financing choice is taken into account.
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