David M. Harrison

Further Evidence on the Capital Structure of REITs

This study examines the determinants of real estate investment trust (REIT) capital structure decisions from 1990 to 2008. Using a broad sample of 2,409 firm-year observations, we find that asset tangibility is positively related to leverage, whereas profitability and market-to-book ratios are negatively related. Additional evidence suggests that firm debt capacity varies systematically with the unique operating and financing mechanisms employed by REITs. These results are robust across both aggregate firm debt levels and marginal security issuance decisions. Finally, our results provide further insight into competing capital structure theories, generally supporting empirical predictions derived from the market timing and trade-off theories, although failing to support pecking order theory predictions.

Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default

This study examines underwater primary resident homeowners to identify why some decide to strategically default while others do not. We find that realized shame and guilt are consistent with ex ante expectations. However, the financial backlash experienced by strategic defaulters is less than anticipated, causing strategic defaulters not to regret their actions. State‐specific bankruptcy exemption levels and real estate laws only marginally explain the decision to strategically default, partly because the decision to walk away from a mortgage is emotional, and partly because the implementation of these laws is uncertain and confusing to distressed borrowers. Rather, we find key strategic default drivers include the homeowners expectation of future real estate price movements, frustration with the lender, moral evaluation of the decision to strategically default, loan knowledge, political ideology, gender, income and age.

The political economy of green office buildings

Purpose – This paper aims to examine whether rental premiums accrue to environmentally certified class “A” office buildings and, further, to what extent such premiums vary with the political ideology of the local market area.Design/methodology/approach – Using standard ordinary least squares (OLS) regression techniques, the paper models rental rates on environmentally certified structures as a function of the space market characteristics, economic environment, and political ideology within each local market area.Findings – The paper finds significant variation in environmentally certified rental premiums across jurisdiction‐specific political ideology metrics. Specifically, politically liberal locations exhibit green rental premiums of nearly 6 percent, while politically conservative locations exhibit premiums of less than 2 percent.Originality/value – This paper expands the existing literature by offering further evidence of positive rental premiums accruing to environmental certification, and by systema...

Mimetic Herding Behavior and the Decision to Strategically Default

This study examines the herding behavior of individuals in the context of their willingness to strategically default on a mortgage based on the (falsely) observed behavior of those around them. We find that homeowners are easily persuaded to follow the herd and adopt a strategic default proclivity consistent with that of their peers. Herding behavior is stronger when a Maven, or thought leader, is involved and weaker when the person finds strategic default to be morally objectionable. Homeowners appear to herd more for informational gains rather than for social reasons, and do not herd differentially based on signal strength. In a robustness check using a sample of real estate professionals, the strong mimetic herding result continues to hold.

REIT Auditor Fees and Financial Market Transparency

This article examines the relationship between overinvestment in audit services, abnormal nonaudit fees paid to the auditor and market-based measures of firm transparency. Because real estate investment trusts (REITs) must distribute 90% of their earnings as dividends, many are repeat participants in the seasoned equity market. Thus, REITs have unusually strong incentives to strive for security market transparency. We find that the capital markets reward REITs that overinvest in audit services with better liquidity as measured by bid-ask spreads. However, firms with abnormally high nonaudit expenditures appear to be penalized with wider spreads, consistent with the notion that such fees may compromise auditor independence.

Familiarity Bias and Perceived Future Home Price Movements

This study empirically confirms the existence of the status quo deviation aversion hypothesis, but not increasing status quo deviation aversion, in people who own their primary residence. The examination was conducted in the 20 Case-Shiller Metropolitan Statistical Areas across the country. The results are systemic and do not vary substantially by demographic characteristics. However, variations are noted with different levels of real estate knowledge, income, purchase motive, relative home tenure, and excess relative housing risk.

Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach

While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is historically high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and costs surrounding critical dimensions of the lenders decision to modify a loan and the borrowers decision to strategically default in an attempt to encourage such a modification. We mathematically demonstrate that it is rarely economically rational for lenders to modify loans. For the borrower, we find that their negative equity position, growth rate in home prices, and the probability the lender will exercise its legal right to recourse represent the top three strategic default determinants.

Can Agents Influence Property Perceptions Through Their Appearance and Use of Pathos

This study takes 1594 potential homebuyers on a Web-based audio/visual tour of a typically priced home in their area. Using a voice-altering software as well as before and after extreme makeover photos, we are able to isolate the effect of real estate agent characteristics—attractiveness, gender, and pathos—on their ability to change the opinions of potential homebuyers. We find that attractive female agents who employ pathos are significantly able to alter the impression of the property in the minds of respondents. Furthermore, agents using pathos are not viewed as less trustworthy than agents not using pathos.

Perceived Versus Actual Susceptibility to Normative Influence in the Presence of Defaulting Landlords

Using an Instant Response Device within the context of a controlled experiment, we find that people’s self-assessment of Susceptibility to Normative Influence (SNI) differs substantially from the actual, or true, degree to which they are influenced by the actions of others. Actual SNI, a subconscious reaction to the behavior of those around us, can be altered when participants (falsely) believe their peers differ in their willingness to sign a new lease under various rental reduction incentives when their landlord has defaulted on his mortgage. The results are insensitive to eight alternative measures of actual SNI. This study supports the behavioral finance literature relating to herding in that we show people are very much willing to follow the lead of their peers, even in situations where information gain is not the likely derived benefit. Instead, people appear to herd in our study for social reasons.

Is Community Reinvestment Act (CRA) lending profitable?: evidence from rating revisions

Traces the history of the Community Reinvestment Act (CRA), which requires US lenders to meet the credit needs of their local customers, and presents a study of its effect on profitability. Looks at financial institutions which received revized CRA ratings between 1990 and 1995, analysing their characteristics before and after revision, and finds upgraded banks hold more loans and are likely to be either rapidly growing and/or reaching deeper into the pool of applicants. Goes on to show that interest on CRA‐related loans is lower than on others, i.e. profitability is reduced and risk increased. Concludes that although CRA activities may open new markets and build new skills for lenders, their costs are likely to exceed their benefits for most institutions.