Effects of Regulatory and Market Constraints on the Capital Structure and Share Value of REITs: Evidence from the Italian Market

In contrast to the US experience, most international (European) real estate investments trusts (REITs) are subject to prudential regulation. This paper investigates the effects of prudential regulation on capital structures and consequently, the REIT share values of major legal and market constraints (i.e. leverage limitations, market discount on net asset value (NAV), tax controls) that affect non-US REITs. Italian market data are used for an empirical analysis. Our hypothesis is that in a constrained environment, the effects on share price significantly depend on the adopted valuation perspective, i.e. if shares are valued by following a NAV or a financial approach. The logic for this hypothesis is that the two valuation methodologies perceive leverage and implied financial risk differently. In particular, we argue that NAV valuation techniques incentivise REITs to maximize leverage regardless of the financial theory which indicates a contrasting impact of debt on the market value of shares. Differences in financial risk perception could also partially explain market price discounts on NAVs.The empirical results seem to support these expectations. Almost all Italian REITs tend to increase debt ratios over time. NAV discounts are significantly related to leverage. The discount effect is largely attributable to NAV increases that result from rising debt levels. On the contrary, share market prices tend to be independent from leverage. The latter result may indicate that the classic capital theory applies and current debt ratios do not imply bankruptcy risk. The results have significant policy implications in terms of an optimal regulatory design.REIT regulation; Leverage; NAV discount; REIT capital structure; REIT valuation

Teoria dell’intermediazione bancaria e finanziaria

Il contributo analizza le funzioni del sistema finanziario e, alla luce delle imperfezioni dei mercati, le ragioni e le teorie che spiegano l'esistenza degli intermediari finanziari e creditizi. In questa logica si approfondisce l’interpretazione teorica della banca quale asset broker e asset transforme

Effects of Regulatory and Market Constraints on the Capital Structure and Share Value of REITs: Evidence from the Italian Market

In contrast to the US experience, most international (European) REITs are subject to prudential regulation. This paper investigates the effects on capital structure and, consequently, on REITs\u2019 share value of the major legal and market constraints (i.e. leverage limitations, market discount on NAV, tax controls) affecting non-US REITS. Italian market data are used for the empirical analysis. Our hypothesis is that in a constrained environment the effects on share price significantly depend on the adopted valuation perspective, i.e. if shares are valued following a NAV or a financial approach. The logic for this hypothesis is that the two valuation methodologies perceive leverage and implied financial risk differently. In particular, we argue that NAV valuation techniques incentivise REITs to maximize leverage regardless of financial theory indicating a contrasting impact of debt on shares\u2019 market value. Differences in financial risk perception could so also partially explain market prices discounts on NAV. The empirical results seem to support these expectations. Almost all Italian REITs tend to increase debt ratios over time. NAV discounts are significantly related to leverage. The discount effect is largely attributable to NAV increases that result from rising debt levels. On the contrary, share market prices tend to be independent from leverage. The latter result may indicate that classic capital theory applies and that current debt ratios do not imply bankruptcy risk. The results have significant policy implications in terms of optimal regulatory design

Macro Asset Allocation with Social Impact Investments

Using a unique dataset of 50 listed companies that meet the majority of the OECD requirements for Social Impact Investments, we construct a Social Impact Finance stock index and investigate how investing in Social Impact Firms can contribute to portfolio risk-return performance. We build portfolios with three different methodologies (na\uefve, Markowitz mean-variance optimization, GARCH-copula model), and we study the performance in terms of returns, Sharpe ratio, utility and forecast premium based on a Constant Relative Risk Aversion function for investors with different levels of risk aversion. Consistent with the idea that Social Impact Investment can improve portfolio risk-return performance, the results of our macro asset allocation analysis show the importance of a large fraction of investor portfolios stake committed to Social Impact Investments