Listed Property Company Valuation

Abstract: Among stock market participants, the existence and persistence of deviations between a property company's market capitalization and Net Asset Value are well-recognized. This deviation has a clear link to the premiums and discounts to NAV of closed-end funds, which is referred to as the closed-end fund puzzle in financial economics. As it undermines theories of market efficiency and persistently violates the law of one price, it has generated a significant amount of research. When exploring potential explanations, two schools of theory stand out within the existing literature: the rational firm-specific theory and the behavioral noise trader model. The rational firm-specific theory suggests that the deviations are fundamentally linked to company-specific factors while the noise trader model suggests that the deviations are caused by changes in the noise trader sentiment. This paper explores the changes in quarterly NAV premium and discounts between 2011 to 2020 among Swedish listed property companies, which has not been extensively tested before. By applying three OLS regression models on cross-sectional data, we find that both rational firm-specific factors such as size, debt ratio, management's reputation, insider and strategic ownership, and volatility as well as behavioral variables contribute to the NAV deviations. However, we find that including company- and quarter fixed effects heavily increases the explanatory power of the regressions, suggesting that there are variables unaccounted for in the model which opens up for further research.