Geographic Diversification and Real Estate Firm Value: Where Firms Diversify Matter

Abstract

This study explores an important determinant of geographic diversification for real estate firms by considering the regional development disparities in their asset locations. We conjecture firms have more access to resources and investment opportunities in regions undergoing development, but they also face stiffer competition for resources at these locations. Moreover, transaction costs vary with regional development. Utilizing the Chinese setting that exhibits significant development differences across regions, we found that the location of geographic diversification significantly impacts firm value. Specifically, our findings show a higher exposure to the developed Chinese cities, as measured by the City Momentum Index (CMI), reduces the benefit of geographic diversification. We further show that the mitigating effect is stronger for the Tier 1 cities, supermomentum cities, and cities that exhibit high price growth in the real estate sector. This means the benefit of geographic diversification comes from variations in industry development and socioeconomic momentum, and is therefore not dependent on only the developed cities. Overall, our study implies high market competition and established institutions in the developed regions in China actually lower diversification benefit. In so doing, we highlight the importance of considering local institutional differences in ascertaining the benefit of geographic diversification for the Chinese real estate industry.