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Leverage and NAV discount: evidence from Italian real estate investment funds

Leverage and NAV discount: evidence from Italian real estate investment funds Purpose – The closed‐end fund puzzle is one of the most famous unsolved issues in financial economics and as such, over time, it has raised the interest of many authors also in the real estate field. The aim of this paper is both to determine whether the effect of leverage on net asset value (NAV) discount is biased by an accounting effect as well as to investigate the determinants of NAV discount by means of the “rational” approach. Design/methodology/approach – The hypotheses are tested by using both the traditional formula as well as a new, unlevered one to calculate the NAV discount. A best subset analysis is carried out to ascertain the better set of determinants. Findings – The main result of the analysis is that the influence of leverage on the NAV discount is biased by an accounting effect while other factors are highly significant. Research limitations/implications – This paper is a starting point for additional research on some of the identified factors as well as on similar samples for which a wider set of data is available. Originality/value – The homogeneity of the Italian real estate investment funds sample, which is not biased by any fiscal effect, and the use of an unlevered formula to calculate NAV discount are important factors when trying to understand the determinants of NAV discount. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Leverage and NAV discount: evidence from Italian real estate investment funds

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Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-9269
DOI
10.1108/17539260910959545
Publisher site
See Article on Publisher Site

Abstract

Purpose – The closed‐end fund puzzle is one of the most famous unsolved issues in financial economics and as such, over time, it has raised the interest of many authors also in the real estate field. The aim of this paper is both to determine whether the effect of leverage on net asset value (NAV) discount is biased by an accounting effect as well as to investigate the determinants of NAV discount by means of the “rational” approach. Design/methodology/approach – The hypotheses are tested by using both the traditional formula as well as a new, unlevered one to calculate the NAV discount. A best subset analysis is carried out to ascertain the better set of determinants. Findings – The main result of the analysis is that the influence of leverage on the NAV discount is biased by an accounting effect while other factors are highly significant. Research limitations/implications – This paper is a starting point for additional research on some of the identified factors as well as on similar samples for which a wider set of data is available. Originality/value – The homogeneity of the Italian real estate investment funds sample, which is not biased by any fiscal effect, and the use of an unlevered formula to calculate NAV discount are important factors when trying to understand the determinants of NAV discount.

Journal

Journal of European Real Estate ResearchEmerald Publishing

Published: May 8, 2009

Keywords: Assets; Gearing; Real estate; Discounts; Investment funds; Italy

References