Heesch, Luuk van (2021) Public REIT returns: the mechanism of leverage and diversification. Master thesis.
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Abstract
The mechanism between leverage and geographical diversification has an essential role in identifying a negative diversification discount effect. High leverage levels increase firm-specific risk that can be diversified away, thereby lowering the risk premium in the form of lower excess returns. This paper investigates whether this mechanism applies to REIT excess returns by using a panel regression over three continental groups. Findings show a diversification discount in the form of a negative effect for the pooled- and European group on REIT excess returns. Further analysis shows that only specialized REITs incur this negative diversification discount effect on excess returns whereas this effect is no longer present when the REIT is diversified at any level. Furthermore, medium- to high leveraged REITs experience this negative diversification discount effect when geographically diversifying—illustrating that decreasing excess returns from a diversification discount effect is a function of a REIT’s leverage level. These results imply that REITs with higher leverage levels can use geographical diversification to lower firm-specific risk, thereby, exposing investors to a lower risk.
| Item Type: | Thesis (Master) |
|---|---|
| Degree programme: | Real Estate Studies |
| Supervisor: | Daams, M.N. and Liu, X. |
| Date Deposited: | 06 Sep 2021 11:33 |
| Last Modified: | 06 Sep 2021 11:33 |
| URI: | https://frw.studenttheses.ub.rug.nl/id/eprint/3696 |
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