Corporate Real Estate Usage and Firm Valuation

Abstract

The trade-off between the potential benefits and costs of using corporate real estate (CorRE) in the production process creates an optimal level of CorRE that varies over time and across firms. We document the importance of conditioning on a firm’s optimal CorRE usage when analyzing the relation between CorRE and firm valuations. Controlling for year and firm fixed effects and using rolling-window regressions, we estimate differences in firms’ actual CorRE usage from predicted levels by industry and examine how the difference affects firm value. We find a nonlinear relation between firm value and the deviation of CorRE usage from predicted levels: investors tend to punish the valuations of companies when CorRE usage deviates from predicted levels, especially for the companies that use more CorRE than predicted. This result is robust to instrumental variable regressions. We uncover several channels through which deviations in the use of CorRE can affect firm value: firm profitability, the cost of debt, sales growth, and investment in non-real estate assets.

Keywords: Corporate real estate, real estate usage, firm value, profitability

JEL Classification: G12, R33