Which stocks are driven by which interest rates?

ABSTRACT

This paper analyzes the return sensitivities of real estate value and growth stocks to changes in five different interest rate proxies. Using a global sample of 352 listed real estate companies from 12 countries as a test object, we find that real estate value stocks are more sensitive than real estate growth stocks to changes in the short-term interest rate. This finding is consistent with the theory that investors with shorter investment horizons trade off the high initial yield of value stocks against lower-risk short-term interest rates. In contrast, real estate growth stocks are more sensitive to changes in the long-term interest rate, which is consistent with a stronger impact on the present value of the future cash flows of growth stocks. We also find that real estate value stocks are more sensitive to changes in the credit yield. Because credit costs have a direct impact on a firm’s cost of capital, this result is consistent with risk-based theories of the value premium, which argue value stocks are riskier because they tend to have higher leverage and greater default probability.

KEYWORDS:

• Interest rate sensitivity
• value vs. growth
• net asset value

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Defined as ‘the ownership, trading and development of income-producing real estate.’

2. http://www.epra.com/research-and-indices/indices

3. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/datalibrary.html

4. The Pesaran (2015) test for cross-sectional dependence reveals that each regression is robust in regards to (weak) cross-sectional dependence. To test for heteroscedasticity, we perform a modified Wald Test, which indicates the presence of groupwise heteroscedasticity in most regressions. Moreover, we test for serial correlation using the Wooldridge (2002) test for serial correlation. The results indicate serial correlation in some of the regressions.

5. Following the suggestion of an anonymous referee, we include all three interest rates simultaneously and obtain results that are qualitatively in line with our main results. Moreover, as an additional robustness test, we examine the impact of our interest rate proxies on the sample of growth stocks and value stocks individually. The results are again qualitatively robust, with the exception of the impact of short-term rates which is negative (positive) but insignificant for value (growth) stocks. To provide conclusive empirical evidence on Hypothesis 1, however, a regression based on the combined sample is needed, which we provide in Table 3, column 5. The robustness tests are available from the authors upon request.

6. When running a regression just on the sample of value stocks, the coefficient on LTIR is −2.60 (t-statistic −2.78), and the coefficient on growth stocks is −3.39 (t-statistic −5.41). While these results are consistent with H2, the regression results in Table 4, model (5) provide more direct empirical evidence for H2. These results are available from the authors upon request.