Abstract
This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector; the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool; the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily stock returns of real estate companies and identify the regulatory events through news published in major international financial newspapers and news agencies. Our results show different responses across the three regulations. For Basel III we find support for the regulatory burden hypothesis of the bank lending channel for small real estate firms and firms with low debt-to-equity ratios as they cannot diversify their funding sources. The direct regulatory effect as tested using AIFMD announcements supports the profit-based reaction hypothesis for large firms. We also show that the news have asymmetric effects with tighter regulation news more frequently leading to significant responses in average abnormal returns (AARs) than loosening regulation news.
Highlights
In the aftermath of the global financial crisis (GFC) regulators tried to strengthen the resilience of the financial system and reduce systemic risks by improving the existing financial market regulations and putting new regulations in place
Whereas Basel III extends the regulations for depository institutions imposed by Basel II, the Alternative Investment Fund Management Directive (AIFMD) is a new regulation that targets non-UCITS funds, which are regarded as alternative funds including private equity, hedge funds and real estate funds in order to increase the transparency of that market and better protect investors
The results distinguish across the three regulations – Basel III, AIFMD and European Market Infrastructure Regulation (EMIR)
Summary
In the aftermath of the global financial crisis (GFC) regulators tried to strengthen the resilience of the financial system and reduce systemic risks by improving the existing financial market regulations and putting new regulations in place. Whereas Basel III extends the regulations for depository institutions imposed by Basel II, the AIFMD is a new regulation that targets non-UCITS funds, which are regarded as alternative funds including private equity, hedge funds and real estate funds in order to increase the transparency of that market and better protect investors. The above regulations potentially could have strong direct or indirect effects on real estate companies. We could observe indirect effects stemming from Basel III given the high credit intensity of direct real estate as an asset class. Other types of regulation such as AIFMD target directly real estate companies and funds. They can be associated with increases in the cost of compliance or increases in operating costs having a direct impact on the cash flows of real estate companies. The instruction of EMIR could have strong effects on real estate companies which are trading such securities and may have indirect effects on the cost of hedging and their performance
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