APPLIED ECONOMICS AND POLICY


Introducing “Focused Firms”: Implications from REIT Prime Operating Revenue Journal of Real Estate Finance and Economics, 67, 3, October 2023 LINK TO PAPER


PENG (PETER) LIU PROFESSOR


SINGAPORE TOURISM BOARD DISTINGUISHED PROFESSOR


IN ASIAN HOSPITALITY MANAGEMENT Cornell Peter and Stephanie Nolan Schooll of Hotel Administration


Cornell SC Johnson College of Business Cornell University


Co-authors • Peng (Peter) Liu


Professor, Singapore Tourism Board Distinguished Professor


in Asian Hospitality Management, Cornell Peter and Stephanie Nolan School of Hotel Administration, Cornell SC Johnson College of Business, Cornell University • Zifeng Feng, University of Texas at El Paso


Summary


Firm diversification has been widely researched theoretically and empirically in the fields of corporate finance, industrial organization, and strategic man- agement for over 40 years. Previous studies have measured focus by analyzing diversification across lines of business defined by the Standard Industrial Classification System (SIC),S but this work examines a single SIC-defined industry – real estate investment trusts (REITs), which own and typically operate real estate or related assets. Te authors consider prime operating revenue rations, or POR, to examine a firm’s main business focus and its risk and performance. An REIT’s main business model involves property rentals, so its prime operating revenue ratio (POR) is measured as the ratio of rental revenue to total revenue.


REITs that earn more revenue from their prime business—property rentals— are less apt to take on risk but also achieve higher operational performance in the cross-section and over the medium term and are associated with less information asymmetry, higher operational efficiency, and higher market value. Consequently, Liu et al. investigate why some REITs focus to a greater extent on non-prime businesses. Tey provide evidence that REIT executives receive, on average, higher pay when their firms engage more extensively in other businesses, and larger REITs are more likely to explore non-rental-reve- nue businesses. Using the coronavirus pandemic as a quasi-experimental set- ting, they find that REITs earning higher POR in recent years generally achieve better operational performance and reduce risk during the first three quarters of 2020. Tese results suggest that a REIT’s focus on its prime business gener- ally leads to greater profitability and lower risk.


TO IMPACT CONTENTS


RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2023 EDITION


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