Is Financial Regulation Good or Bad for Real Estate Companies? –: An Event Study

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.