Investor Sentiment and Noise Traders: Discount to Net Asset Value in Listed Property Companies in the U.K.

Abstract

There are parallels between the operation of closed-end funds and in the United Kingdom property companies. In both types of corporations, the market capitalization is commonly less than the net asset value (NAV) of the assets owned by the firms. This article investigates the relationship between the NAV of U.K. property companies and their market capitalizations. We first examine the hypothesis that discounts are the result of agency costs, contingent capital gains tax liability and a number of other firm specific factors. We then examine the hypothesis that discounts result from the interaction of noise traders and rational investors. The evidence suggests that both hypotheses have utility in explaining property company discounts.