ARCHITECTURE

value
shareholders
exploit
inefficiencies
think of
real estate
as an asset
value, the text goes on to explore the implications
of contracts and global conditions for risk management.
Sections 9 and 10 cover the diagnosis, planning,
and restructuring of corporations. The typical
chapter begins with an overview; features examples,
articles from financial publications, and guidance on
how to use Excel spreadsheets; and concludes with
problem sets and brief case studies.
This book upholds shareholder value as the key to
corporate finance. Corporations serve as agents of
the shareholder, who could be an individual, firm,
or mutual fund. The task of the corporation is to
maximize share values. 24 Value maximization is an
ahistorical human drive, the expression of innate
competitiveness. 25
Competitive advantages ensure economic rents, or
“profits that more than cover the cost of capital.” 26
According to the efficient markets hypothesis, transparency
and freedom from regulation will, in the
long run, eliminate economic rents by encouraging
competitive equilibrium. Given this dynamic, financial
management works to increase value by maximizing
more or less temporary competitive advantages
using mathematical techniques. Tacit in this
formulation, yet clear in the examples, is the fact that
to the degree that it is scarce and unique, land also
earns economic rents. Property in the form of land
can bring opportunities for leveraging asymmetrical
access (i.e. unavailable to non-owners). For example,
in deciding whether to open a department store on a
parcel of land, an investor is making “two bets—one
on real estate prices and another on the firm’s ability
to run a successful department store.” Depending on
real estate projections, the owner may be better off
either renting out the real estate or selling the land
and renting it back for the store. 27
In Brealey, Myers, and Allen’s text, real estate, while
a tangible commodity linked to a plot of land, appears
as one of many kinds of assets. It is thus described relationally:
like gold and oil, it has extensive markets
and is easy to price. Like banks and utilities, it has high
abandonment value—used properties are easy to sell. 28
distribute
ownership
and risk with
securities
Portfolio Standard Deviation
Due to its ease of trading, the real estate sector relies
on debt financing, which is taxed at a lower rate. 29
Real estate can also be traded as market securities,
which are claims on real assets. Entities such as real
estate investment trusts (REITs) assemble portfolios
that include real-estate securities. [See HH: 2015] For
any given portfolio, analysts estimate returns on investment
by researching the performance of similar
portfolios, a technique which, the efficient-markets
hypothesis holds, will provide fair, “fundamental”
valuations. Many of these securities offerings lump
together diverse properties in order to minimize
overall risk. But other products select for specific
types of properties—grouped, for example, by use
and size—creating particular risk and value profiles
often used by investors to shape larger portfolios.
Specific Risk and Market Risk, Brealey, Myers, and Allen, p. 170.
beware of
market
distortions
Specific Risk
Diversification eliminates specific
risk. But there is some risk that
diversification cannot eliminate.
This is called market risk.
Market Risk
Number of Securities
Financial actors trade not only claims on real assets,
but also their risks, which can take on value in the
form of derivatives. Sophisticated analysis of the values
of specific groups of assets and derivatives can
give one a competitive advantage through means
such as arbitrage, the risk-free exploitation of loopholes
in the market.
However, there is a potentially fatal anomaly in the
efficient-markets hypothesis: bubbles. Sometimes,
instead of being dictated by “fundamentals,” specu-
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