Capital-Market Competitiveness and Managerial Investment Decisions : Evidence from Commercial Real Estate

We investigate the association between capital-market competitiveness and the quality of investment decisions that delegated money managers make. We use commercial property as a natural laboratory, in that this industry contains funds that are traded in segmented capital markets of different competitiveness, but whose managers all choose from the same investment opportunity set. We find that the submarkets most bought by REIT managers outperform the least-bought (or most sold) submarkets, while for our groups of private managers this effect decreases in line with the competitiveness of their capital markets. We also distinguish between movement into submarkets in genuine anticipation of high returns, versus stock chasing, or movement into submarkets that offer availability and therefore easy entry. We find that REITs tend to move into submarkets in anticipation of high returns, while private institutions have more tendency to stock-chase, with such behavior again becoming more prevalent the less competitive the capital market