Title: Market Sentiments, Winner's Curse, and Bidding Strategy in Real Estate Auctions
Reference Number: 1061
Publication Date: July 2000
JEL Classifcation:
Author(s):

K.S. Maurice Tse
The University of Hong Kong

Abstract:

The objective of this study is to examine the effect of prevailing market sentiments in real estate markets on the stock market response to the outcomes of real estate auctions in Hong Kong. The reactions of stock market to the winners of the auctions have at least two interesting implications. On one hand, the success in acquiring a real estate implies that the developer has acquired a project with potentially positive net present value and the stock price of the developers should rise. Bids on real estate development projects are often based on the developer's estimate of potential costs and profits. These estimates, when conditioned on the current market information, may be highly influenced by the prevailing market sentiments. The complexity of estimating the development costs may cause the developers to arrive at different estimates and thereby different bids. The prevailing market sentiments in the real estate markets may also affect the bidding behavior of the bidders. During periods when the real estate prices are soaring, the bidders may bid more aggressively against each other. As a result, the successful bidder may be the victim of the "winner's curse". If this is the case, investors in the stock market should view this as a factor that negatively affects the stock price of the developer, thus discounting the stock price of the winning firm. The availability of the auction records and the stock prices in Hong Kong provides us an excellent opportunity to test the auction theory and allows us to examine how the stock market evaluates these two counteracting effects. Moreover, we can investigate how market sentiments in the real estate markets may affect the stock market response to the auction winners.

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Last modified: 07/15/2003