Most financial managers pick investments and look at how they can generate value; we look at how the manager can generate value themselves by making the right financial choices
- Eva Steiner
An analysis which shows how the financing activities, or “capital structure”, of real estate firms can be used as a barometer of their overall value has been published online.
The research provides the first evidence-based assessment of which capital structure characteristics are common to successful firms in the US and several European countries. It promises to provide financial decision-makers with a model for enhancing company value, while also offering potential investors a litmus-test from which they can make sounder judgements about a firm’s overall strength.
The work represents a break from traditional approaches to gauging company value, which often deliberately presume that a firm’s financing activity is irrelevant to the value of the firm itself. By making this presumption, economists can account for real-world stresses that might affect the financial decision-making that goes on inside a company, such as taxation, or fluctuations in capital markets.
By contrast, the new research argues that stronger firms nevertheless display consistent characteristics in how they finance their activities and manage debt, and that these can be used as a basis of gauging their value overall.
In particular, it suggests that low leverage – a low ratio of debt to the overall value of shares and assets – is a particularly strong and dependable indicator of the value of a firm.
The study was commissioned by the European Public Real Estate Association (EPRA), and carried out by Dr Eva Steiner, a member of the Department of Land Economy and Fellow of St John’s College, University of Cambridge, and Dr Timothy Riddiough, from the Wisconsin School of Business in the US.
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Image: Stock exchange workers. Typically the valuation of companies presumes that capital structure does not influence value, but the new study identifies several consistent features among the financing activity of real estate firms
Credit: reynermedia on Flickr
Reproduced courtesy of the University of Cambridge
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