Robbing the Bank: Non-recourse Lending and Asset Prices

Robbing the Bank: Non-recourse Lending and Asset Prices We investigate the market prices of assets in fixed supply whose purchase is typically financed through non-recourse loans. The largest and most common asset in this category is real estate. We demonstrate two features of such markets: • lenders' underpricing of the put option contained in non-recourse loans leads to inflated asset prices within efficient markets, and • lenders with short-term horizons have incentives to underprice the put option. These results hold when participants in both equity and debt markets are rational. The model also allows for management compensation that is aligned with maximizing bank shareholders' value. Using real estate transaction data we find empirical evidence consistent with the predictions of the model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Robbing the Bank: Non-recourse Lending and Asset Prices

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/B:REAL.0000011151.02848.1a
Publisher site
See Article on Publisher Site

Abstract

We investigate the market prices of assets in fixed supply whose purchase is typically financed through non-recourse loans. The largest and most common asset in this category is real estate. We demonstrate two features of such markets: • lenders' underpricing of the put option contained in non-recourse loans leads to inflated asset prices within efficient markets, and • lenders with short-term horizons have incentives to underprice the put option. These results hold when participants in both equity and debt markets are rational. The model also allows for management compensation that is aligned with maximizing bank shareholders' value. Using real estate transaction data we find empirical evidence consistent with the predictions of the model.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 18, 2004

References

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