Corporate Real Estate Usage and Firm Valuation: Evidence from a Dynamic Partial Adjustment Model

The trade-off between the potential benefits and costs of using corporate real estate (CorRE) in the production process creates an optimal level of CorRE that varies over time and across firms. We document the importance of conditioning on a firm’s optimal CorRE usage when analyzing the influences of CorRE on firm valuations and stock returns. Using a dynamic partial adjustment model, we estimate differences in firms’ actual CorRE usage from optimal levels and the speed at which firms move toward their optimal CorRE usage. We find that investors tend to punish the valuation of companies that deviate from optimal CorRE usage, probably through the channel that large deviations from optimal CorRE usage hurt firm profitability. The positive stock return-CorRE relationship documented by previous studies mainly holds for firms with too little CorRE.