Three Essays on Financial Contracting and Real Estate
Open Access
- Author:
- Wu, ZhiYi
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- August 07, 2006
- Committee Members:
- Kenneth Michael Lusht, Committee Member
Abdullah Yavas, Committee Chair/Co-Chair
Coenraad Arnout P Pinkse, Committee Member
Lisa Lipowski Posey, Committee Member - Keywords:
- Tax
Moral Hazard
Hidden Information
Real Estate Investment Trust
Stock Options
Compensation - Abstract:
- This thesis consists of three essays. In the first essay, we examine the option compensation problem of how to optimally set the option exercise price when options have conflicting roles in both inducing management effort and encouraging management cheating. In the risk-neutral setting with both hidden information and hidden actions, we establish that the larger the information gap between the principal and the manager is, the lower the option exercise price should be set. In a dynamic extension that involves at-the-money options only, we prove that it is optimal to grant more options even following a bad stock performance. Further, we prove that the strategy of granting short-term options dominates that of granting long-term options and then repricing, if options become out of money. In the second essay we analyze the agency problems caused by the tax timing conflict of interest in Umbrella Real Estate Investment Trusts (UPREITs). The tax timing conflict arises if management¡¯s tax basis is lower than that of REIT shareholders. Management may be reluctant to sell the properties because it may trigger large build-in capital gains tax for them. After having controlled for the difference in tax basis and various other factors, we find that the UPREIT share price suffers additional discount. This finding is consistent with that UPREITs suffer additional agency problems related to tax timing conflict of interest. Moreover, we also demonstrate that it can be optimal not to defer tax in real estate transactions when the income tax rate is higher than the capital gains tax rate. In the third essay we examine how the pricing differences between the public (securitized) and private real estate markets along with other factors may influence REITs¡¯ property selling decisions. Current research supports the conclusion that REITs actively arbitrage only if real estate pricing in public market is higher than in private market. Using a large sample of REIT property holding data, we however find that REITs are also active in exploiting price differences when real estate pricing in public market is lower. Furthermore, we identify a series of important factors in REITs¡¯ property selling decisions.