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Valuing Real Estate With Accurate Firm Analysis

“Firm Investment and Its Effects on Value Creation: An Alternative Perspective”, by J. van der Goes and C. Chung, Review of Economic Theory and Policy, Vol. 5 (Springer, 2021). This paper explores the link between firm investment and firm growth. The paper reveals that financial Leverage is significantly and negatively related to firm growth. Moreover, it is found that the effect of financial Leverage on firm growth is quite significant for medium information asymmetric firms.

Firm Investment

The third proposition is that misvaluation-induced risks are important for public firms. To support this hypothesis, we argue that excess costs in firms can lead to increased risk-taking and hence to more profits inefficiency. We use an alternative measure of firm profitability to measure the extent to which firms underperform their peers in a given time period.

Financial Misvaluation Inefficiency in Public Firms. The fourth proposition is that excess costs in firm investments can lead to increased risk-taking and hence to more profits inefficiency. To support this hypothesis, we use a different measure of profitability to measure the extent to which publicly traded companies underperform their peers in a given time frame. Finally, we test the sensitivity of firm investments to various inputs and explore the implications of misvaluation on investment across multiple firms.

Risk-taking and Return Shifting in Investment. The fifth proposition is that increased risk-taking and lower return-making capacities may lead to greater variation in firm investments. This suggests that firms may be more or less sensitive to different risk-taking and return shifting impacts. The analysis draws on the existing literature on investment and firm decision-making to investigate the potential sources of variation across firms and to test the hypothesis that increased risk-taking and lower return-making capabilities are positively associated with inefficient firm investment strategies. We present a framework and discuss the implications of the results in terms of investment strategy and practice.

Capital Budgeting Analysis. The sixth proposition is that firms may engage in inefficient allocation of assets across multiple exposure horizons. For this reason, firms may allocate assets in different markets based on incomplete knowledge of market trends. To test this hypothesis, we develop a financial model and apply it to the analysis of capital budgeting for different levels of fixed assets. The results reveal that firms tend to make systematic errors in capital budgeting that cause them to allocate inefficiently across asset categories.

Value Stream Analysis. The seventh proposition is that firms may not exploit all of the value streams in their portfolios. To test this, we develop and test a value stream pricing model using data from a large number of real estate transactions.