Academic journal article Journal of Real Estate Portfolio Management

Cross-Border Investment and Firm Liquidity

Academic journal article Journal of Real Estate Portfolio Management

Cross-Border Investment and Firm Liquidity

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Information moves markets. All else equal, the more the market knows about a firm, the more accurate the firm's valuation will be. While corporate disclosures, operating characteristics, and investment activities play a central role in establishing the informational opacity of a firm, the past decade has seen considerable attention given to geographic distance. As outlined in more detail below, a consensus has begun to emerge across the finance and investments literature recognizing that geographic considerations materially impact the generation and transmission of information. These studies describe the apparent information advantage accruing to investors who are geographically proximate to a firm. Typically descriptive in nature, they tend to focus on identifying observable linkages between key operational characteristics of interest, while offering relatively little insight into the direct mechanism through which information barriers arise.

Given the continuing advancement of information technology, which potentially reduces the impact of physical distance, more subtle information barriers may prove substantively more important for financial markets. For example, consider a firm making a sizable investment in real property assets located on the other side of the country from the firm's existing operations and headquarters. As the physical location of the investment is not proximate to the firm's existing operations or information nexus of the firm (i.e., headquarters), undertaking the project will increase the geographic scope and dispersion of the firm. While potentially value enhancing, the increase in geographic dispersion also increases valuation complexity due to both the increased difficulty associated with physically monitoring the investment and the corresponding increase in potential agency costs. Extending this framework, imagine that the firm is making this same investment across an international (or other significant geopolitical) border. Investing across such boundary lines will likely further increase the difficulties associated with valuing the company, as investors must contend not only with the physical distance, but also issues associated with different social norms and customs, political ideologies, economic systems, and/or regulatory frameworks and paradigms.

This investigation focuses on the valuation difficulties associated with a firm's cross-border operations. Specifically, the purpose of this investigation is to examine whether, and to what extent, information barriers associated with exposure to geopolitical risk and uncertainty influence the liquidity of publicly traded real estate firms across the Asia-Pacific region. The size, growth, and operating characteristics of both this market sector and the variation with respect to market conditions, maturity, and transparency offered by this geographic region offer unique advantages in identifying the key economic relations we examine. We find strong support for the notion that enhanced exposure to geopolitical risk increases information uncertainty, and is associated with reduced financial market liquidity (i.e., wider bid-ask spreads) for publicly traded real estate firms. These results add important insight and context to the growing literature on the geographic dimensions of firm investment decision making, providing evidence that both distance and location are important factors in shaping a firm's financial market transparency.

The remainder of this paper is organized as follows. In the next section, we review the relevant literature on home bias, information asymmetry and immobility, and the importance of geography to firm characteristics and market outcomes. We outline our empirically testable hypotheses in the following section, along with the data and methodological approaches employed to evaluate them. We then present the results and conclude with a summary of our key findings. …

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