bluuebunny/crossref_metadata_2025 huggingface dataset:
Experiential Education In New Product Design And Business Development
Authors: Cardozo Richard N. , Durfee William K. , Ardichvili Alexander , Adams Carl , Erdman Arthur G. , Hoey Michael , Iaizzo Paul A. , Mallick Debashish N. , Bar‐Cohen Avi , Beachy Robert , Johnson Alec
Published: September 2003

We describe an experiential approach to teaching new product design and business development in a year‐long course that combines intensive project work with classroom education. Our course puts together up to six teams of graduate students from management and engineering who work on projects sponsored by individual companies. Student teams work with faculty from multiple disciplines and personnel from the sponsoring companies. The year‐long format and involvement with company personnel provide opportunities for students to gain hands‐on experience in a real product development project. Time constraints, coupled with students' determination to demonstrate what they can accomplish, stimulate teams to learn how to compress the design and development cycle.

To help students generalize from their own projects to a wider universe of product design and business development phenomena, students participate continuously in constructive critiques of others' projects; and in presentations, case discussions and workshops that help them learn about the product and business development process itself.

This article describes course objectives, syllabus, projects, sponsors, faculty, students and our course administration. In an effort to move towards a “paperless” course, we have put as much of the course material as possible on the World Wide Web; relevant websites are referred to in the article.

At the end of the course each team presents a prototype and a protoplan to the sponsoring company in a final report, which in many cases includes suggestions for the sponsor on how to improve its design and development process. Students' positive evaluations, along with their comments, indicate that they are attaining their educational goals. Course projects have resulted in commercialized products, patents, continuing development projects in sponsoring companies, and placements for students. The course has generated public relations value for the units involved and for the university as a whole. © 2002 Elsevier Science Inc. All rights reserved.
Finding and solving problems in software new product development
Authors: Sheremata Willow A.
Published: September 2003

New product development is notoriously difficult, and software new product development particularly so. Although a great deal of research has investigated new product development, projects developing new software products continue to have problems meeting their goals. In fact, one line of research proposes new product development is difficult because it must solve an ongoing stream of complex problems. I integrate this line of research with two others to develop a conceptual framework of new product development as a process of finding and solving problems. From this framework, I develop four hypotheses that predict the probability projects developing new products will attain their development schedule and product quality goals.

More specifically, I hypothesize that projects that generate access to, and integrate, large quantities of creative ideas, in‐depth knowledge, and accurate information, should increase their probability of attaining schedule and product quality goals. Projects developing new products should both generate and integrate this “knowledge” to solve the problems that stand between them and their goals. However, how projects find problems also matters. Projects that search to identify problems earlier, rather than later, should also increase their probability of meeting schedule and product quality goals.

To test these hypotheses I gathered data on 33 projects that tried to develop new software products from 23 firms, through interviews and questionnaires. Results from regression analyses support three out of four hypotheses. The projects that had high levels of both knowledge generation and integration had a significantly higher probability of attaining their product quality goals, but not their schedule goals. In contrast, projects that merely searched to find problems had a higher probability of attaining both goals. Moreover, projects that not only generated and integrated knowledge to solve problems, but also searched to find them, had the highest probability of attaining their product quality goals.

This study illustrates the usefulness of modeling new product development as a bundle of problems to be found and solved. These results suggest that projects that combine practices to implement high levels of both knowledge generation and integration—not just one or the other—increase their chances of meeting product quality goals. This in turn suggests that focus on any single process or practice may be misplaced. Moreover, proactive search for problems may increase projects' chances of meeting both schedule and product quality goals. In fact, search for problems was highly significant in this study, which suggests the way projects identify problems deserves further study. Although these prescriptions are preliminary, this study suggests they can help projects—and their managers—embody their visions in products and deliver those products to market. et.
Implementing a strategy‐driven performance measurement system for an applied research group
Authors: Loch Christoph H. , Tapper U.A. Staffan
Published: September 2003

Although most companies recognize the importance of R&D for future competitiveness, they often struggle to assess its contribution to the organization. Performance measurement in R&D is particularly difficult because (1) effort levels may not be observable, (2) project success is uncertain, influenced by uncontrollable factors, and (3) success can be assessed only after long delays, or it accrues to other units of the organization.

Based on existing literature on the problem, we developed a performance measurement system for the process technology research group of an industrial company. This measurement system systematically supported the business strategy. Moreover, the measures were adjusted for different project profiles: short‐versus long term, hardware versus software, routine support services versus breakthrough ideas and knowledge development.

The contribution of this article is a description of the process of developing and implementing a comprehensive performance measurement system in a company, based on previous performance management research, and supporting the company's strategy. It is noteworthy that the system was implemented in a research group (as opposed to development), where the measurement problems are the most severe.
Managing platform architectures and manufacturing processes for nonassembled products
Authors: Meyer Marc H. , Dalal Dhaval
Published: September 2003

The article presents methods for defining product platforms and measuring business performance in process intensive industries. We first show how process intensive product platforms can be defined using the products and processes of a film manufacturer. We then present an empirical method for understanding the dynamics of process intensive platform innovation, allocating engineering and sales data to specific platform and product development efforts within a product family. We applied this method to a major product line of a materials manufacturer. We gathered ten years of engineering and manufacturing cost data and allocated these to successive platforms and products, and then generated R&D performance measures. These data show the dynamic of heavy capital spending relative to product engineering as one might expect in a process intensive industries. The data also show how derivative products can be leveraged from underlying product platforms and processes for nonassembled products.

Embedded within these data are strategies for creating reusable subsystems (comprising components, materials, etc.) and common production processes. Hard data on the degree to which subsystems and processes are shared across different products frequently are typically not maintained by corporations for the duration needed to understand the dynamics of evolving product families. For this reason, we developed and applied a second method to assess the degree of reuse of subsystems and processes. This method asks engineering managers to provide subjective ratings on an ordinal scale regarding the use of technology and processes from one product to the next in a cumulative manner. We find that high levels of reuse generally indicate that a product family was developed with a platform discipline. We applied this measure of platform intensity to two product lines of integrated circuits from another large manufacturer. We used this method to gather approximately ten years of information for each product family. Upon analysis, one product family showed substantial platform discipline, emphasizing a common architecture and processes across specific products within the product line. The other product family was developed with significantly less sharing and reuse of architecture, components, and processes. We then found that the platform centric product family outperformed the latter along a number of performance dimensions over the course of the decade under examination.
Commercializing new technologies: consumers' response to a new interface
Authors: Ziamou Paschalina (Lilia)
Published: September 2003

Successful commercialization of new technologies is the riskiest and most rewarding form of new product development activity. New technologies are often commercialized using innovative interfaces that determine how consumers interact with a new product to obtain its functionality. Consumers' perception of uncertainty about the performance of a novel interface is a key issue in the acceptance of new products involving new interfaces. Specifically, when firms commercialize a new interface, they face two major challenges: First to identify the optimal functionality for the new interface, and second, to effectively communicate with consumers in order to reduce uncertainty about the performance of the new interface and increase adoption intentions. Despite the theoretical and managerial importance of research on consumers' response to a novel interface, very little empirical research has been conducted in this area. Building on prior research on new product development, human‐computer interaction, and consumer decision‐making, this article examines the factors that influence consumers' judgments of uncertainty about the performance of a new interface and consumers' adoption intentions. Specifically, we conducted an experiment to investigate the effect of the newness of the functionality of a new product and the effect of imagery on consumers' uncertainty about the performance of a novel interface and consumers' adoption intentions. Our results show that consumers perceive lower uncertainty about the performance of a new interface and higher intentions to adopt a new product when the new interface is introduced with a new (vs. pre‐existing) functionality. Furthermore, our results suggest that when a new interface is introduced with a new functionality, imagining the product in use increases consumers' uncertainty about the performance of the new interface and decreases their intention to adopt the new product. In contrast, when a new interface is introduced with a pre‐existing functionality, imagining the product in use decreases consumers' uncertainty about the performance of the new interface and increases their intention to adopt the new product. Our findings provide valuable guidelines for marketers in formulating new product development and communication strategies for new products involving a new interface. © 2002 Elsevier Science Inc. All rights reserved.
The impact of technology advancement strategies on consumers' patronage decisions
Authors: Pae Jae H. , Hyun Jung Suk
Published: September 2003

Among the many factors that encourage return patronage of incumbent technology, two that have received scholarly attention in other contexts are network externalities and switching costs. However, the roles of network externalities and switching costs in encouraging return patronage of technology have not yet been subjected to rigorous empirical testing. Furthermore, no examination has been conducted of the degree to which these factors play a role in the success or failure of corporate technology advancement strategies designed to encourage return patronage. In this context, we propose a systematic framework to explore the nature of the links between technology advancement strategies and consumer technology patronage via network externalities and switching costs. Based on consumer survey data from South Korea, we find empirical support for the link between technology advancement strategies and consumers' technology patronage. Specifically, both network externalities and switching costs are found to be positively associated with technology patronage. According to this study, consumers value compatibility because it gives them access to a larger network. Further, compatibility strategy is associated with the costs involved in switching away from incumbent technology because of an abundant or varied supply of complementary goods. The results also show that preannouncement is a key marketing strategy to achieve favorable expectations and to retain the patronage of current technology users. © 2002 Elsevier Science Inc. All rights reserved.
Managing seller‐buyer new product development relationships for customized products: a contingency model based on transaction cost analysis and empirical test
Authors: Stump Rodney L. , Athaide Gerard A. , Joshi Ashwin W.
Published: September 2003

Sellers often customize their product offerings in order to increase the value offered to individual buyers and gain a competitive advantage over the seller's competitors. However, such customization has a downside—it usually requires considerable seller‐buyer interactions aimed at matching the seller's technological capabilities with the buyer's needs, which can pose exchange risks such as the safeguarding and adaptation problems noted in the transaction cost analysis literature. In the present study, we develop a contingency model to investigate the impact of product customization on sellers' perceived relationship satisfaction and subsequent expectations of relationship continuity. We draw on the logic of transaction cost analysis to hypothesize that product customization's effect on satisfaction and continuity may be moderated by three activities that sellers may engage in during the new product development (NPD) process: education, product knowledge generation, and joint new product development.

Our substantive hypotheses were tested with data from a national survey of 296 small to medium size firms in several high‐tech industries using a series of hierarchical OLS regression models. Overall, we found mixed support for our hypotheses. The results indicated that joint new product development reduced the negative effect of product customization on seller satisfaction and enhanced customization's positive effect on continuity, as expected. Contrary to our expectations, product knowledge generation activities increased the negative effect of customization on satisfaction; it also had no significant moderating impact on continuity. Buyer education activities were found to reduce the negative impact of customization on satisfaction, but showed no moderating effect on continuity.

This study offers important theoretical and managerial implications. It is one of the first to rely on transaction cost analysis as a basis for examining how various relationship activities conducted during the new product development process moderate product customization's effect on qualitative outcomes. Whereas traditional NPD processes have emphasized unilateral approaches to product development, our study provides evidence of how bilateral approaches to NPD can benefit sellers of innovations. We provide new insights for managers to consider when deciding whether to engage buyers early on and then continue interacting with them throughout the product development process when developing customized products.
Controlling New Products in Large Diversified Firms: A Presidential Perspective
Authors: Bart Christopher K.
Published: September 2003

This article reports the findings of a pilot research project which investigated the nature and degree of control that presidents of large, diversified firms exercise over their new product initiatives. The research findings of this exploratory study challenge some of the conventional notions that exist regarding the management of new products. The control dimensions associated with “high” and “low” new product output situations are identified, and the role of a new product's strategic category in understanding the variations in presidential control is underscored. Most important, the findings represent a first step in capturing the “balance” that presidents appear to strike between “loose” and “tight” control when managing new products. As such, they suggest the potential for developing a control template against which presidents of other large, diversified firms might someday be able to judge their own new product control practices.
Perspective: The Applicability of Percolation Theory to Innovation
Authors: Mort J.
Published: September 2003

The spread of innovation is usually characterized as a diffusion process. This article suggests that there may be some value in viewing this important phenomenon in terms of the mathematical construct known as percolation theory. J. Mort writes that phenomena and concepts such as induction periods, critical percolation thresholds, discrete propagation media, site coordination, clusters, and connective constants all have remarkable analogs in the generally observed features of product innovation. This phenomenological perspective, in which the customer emerges naturally as the controlling factor in the spread of innovations, may account for specific marketing approaches that have facilitated successful innovations such as the Xerox 914 copier. The approach may prove especially relevant in describing the spread of certain information, communication‐based innovations, such as the explosive growth in facsimile (FAX), and other network‐based products, as the utility and value of such products to the customer is inherently linked to the extant degree of connectivity.
Organizational Environment, New Product Process Activities, and Project Outcomes
Authors: Dwyer Larry , Mellor Robert
Published: September 2003

Results of a study of 95 new product projects in 75 Australian manufacturing firms reveal two important sets of links. Firstly, links between the elements of firms' organizational environments and proficiency of new product process activities. Secondly, links between activity proficiency and new product project outcomes. The two findings enable links to be posited between the organizational characteristics of firms and the outcomes of new project projects. The findings have implications for managers wishing to increase the likelihood of successful new product development.
A Cusp Catastrophe Model of the Adoption of an Industrial Innovation
Authors: Herbig Paul A.
Published: September 2003

The diffusion of a technological innovation often follows the pattern of the familiar ‘S’‐curve—the classic smooth, cumulative adoption curve. Yet, an individual firm's decision to adopt or reject an innovation may be filled with discontinuous events, represented by familiar concepts like diffusion thresholds, bandwagon effects and the sudden rejection or displacement of an existing innovation. Paul Herbig reports how catastrophe theory can be used to describe many of these sudden changes and discontinuities. His article describes a model for a firm's adoption or rejection of an innovation via the cusp catastrophe, which he illustrates with a number of possible examples.
Speeding Up New Product Development: The Effects of Leadership Style and Source of Technology
Authors: McDonough Edward F. , Barczak Gloria
Published: September 2003

This article reports the results of a study whose purpose was to investigate factors that contribute to the faster development of new products. Edward McDonough and Gloria Barczak collected data from 30 new product development projects in 12 British companies. They investigated the impact of leadership style and the source of the technologies employed in the project (i.e., internally developed or externally acquired) on speed of development. Their results suggest that leadership style influences speed of development. Moreover, the source of the technologies used in the project moderates the relationship between leadership style and speed of development.
The Impact of Product Innovativeness on Performance
Authors: Kleinschmidt E. J. , Cooper R. G.
Published: September 2003

While many writers and strategists maintain that innovation is important, research has often demonstrated that product innovativeness does not have a major impact on the rate of success in the marketplace. Elko Kleinschmidt and Robert Cooper demonstrate that the relationship between product innovativeness and commercial success is U‐shaped. That means that both high and low innovativeness products are more likely to be more successful than those in‐between. The authors suggest that past research has not allowed for this non‐linear relationship and that their data show that moderately innovative, middle‐of‐the‐road products are less likely to succeed when measured by a number of performance criteria. They explore a number of implications of these results.
The Relationship of R&D/Sales to Firm Performance: An Investigation of Marketing Contingencies*
Authors: Holak Susan L. , Parry Mark E. , Song X. Michael
Published: September 2003

The relationship between a firm's performance and R&D spending is often imperfectly understood, despite the fact that R&D is often a cornerstone of an effective innovation strategy. Susan Holak, Mark Parry, and Michael Song extend the classic innovation‐adoption paradigm developed by Rogers and propose a series of hypotheses describing variations in the relationship between the R&D/sales ratio and a firm's performance. Using data from the PIMS database and contrasting growth‐stage and mature‐stage firms, the authors report that firm and industry characteristics have an important bearing on the R&D‐performance relationship. In addition, managers can influence the incremental effects of added R&D spending on the firm's performance by manipulating certain firm‐contingent variables. Increased R&D spending can have either a positive or negative influence on gross margin under various circumstances.
The R&D–Marketing Interface in Japanese High‐Technology Firms
Authors: Song X. Michael , Parry Mark E.
Published: September 2003

Gupta, Raj and Wilemon [11,12] have examined the R&D–marketing interface in US high‐technology firms. X. Michael Song and Mark E. Parry explore the generalizability of those findings to Japanese high‐tech firms, specifically, comparing the perceptions of 223 Japanese R&D and marketing managers regarding activities that require R&D–marketing integration, the level of achieved integration in Japanese firms and the types of integration related to variations in new product success rates. Their analyses reveal a number of consistencies between the perceptions of US and Japanese managers.
Inward Technology Licensing as an Alternative to Internal R&D in New Product Development: A Conceptual Framework
Authors: Atuahene‐Gima Kwaku
Published: September 2003

Many marketing practitioners and authors already accept that inward technology licensing (ITL) can be a viable alternative source of new products to internal R&D. Yet, new product development research focuses mainly on internal development with little attention to external methods. Kwaku Atuahene‐Gima reviews the small body of literature on ITL and examines the factors that may influence a firm to adopt ITL as an alternative to internal R&D. Using a conceptual framework to provide additional insights, he argues that the ITL adoption decision is an organizational behavioral response to internal and external environmental stimuli.
Evaluating QFD's Use in US Firms as a Process for Developing Products
Authors: Griffin Abbie
Published: September 2003

Quality Function Deployment (QFD) is a process that originated in Japan for managing product development. In this article, Abbie Griffin presents results of a field‐based, scientific study of US firms' efforts to implement QFD methods. Her research goals were to understand the QFD process as it is used and implemented, to begin to estimate US product development improvements attributable to QFD and to identify factors linked to QFD's successful use. Based on a study of 35 projects, she found that QFD demonstrated only relatively minor, short‐term, measurable impacts on product development performance. Yet, the process may have the potential to improve the development climate in the long term, possibly leading to future, measurable improvements in development performance. Successful projects differed in several ways from those projects that failed in their implementation efforts. Finally, the results suggest several characteristics of product development processes that improve the way products are developed in US companies, including structuring the decision‐making processes across functional groups, building a solidly organized, highly motivated team and moving information efficiently from its origin to the ultimate user.
New Products and Financial Risk Changes
Authors: Devinney Timothy M.
Published: September 2003

The historic focus of new products research has been on the ability of new products to enhance the profitability and competitive position of the innovating firm. In this article, Timothy Devinney shows that there exists an overlooked and potentially significant side effect associated with new product innovations: financial risk changes. He reports that significant financial risk changes occurred in approximately 50% of the new product announcements he examined. The magnitude of these financial risk changes translates into overestimates or underestimates of the firm's cost of capital by 17% to 18% and is strongly and positively related to the size of the firm and the firm's new product innovation activity.
From Experience: New Idea Enhancement at Amoco Chemical: An Early Report from a New System
Authors: Felberg Jeff D. , DeMarco David A.
Published: September 2003

Amoco Chemical Company operates the New Ideas Process (NIPr) as its innovation support system for employee ideas generated outside formal business development channels. The system's goal is to operate a process that involves employees in the identification and initial development of ideas for new business opportunities for the company. Jeff Felberg and David DeMarco describe NIPr's basic philosophy, procedures, organization, and staffing. Additionally, they provide quantitative and qualitative results from the first four years of the system's operation for the areas of employee involvement, business concept development, production of funded ideas, and cultural enrichment of the company.
Organizational Influences on the New Product Development Process in Financial Services
Authors: Thwaites Des
Published: September 2003

The last decade has been notable for increasing levels of environmental turbulence brought about by technological advances, deregulation, consumer sophistication, and competition. Consequently a premium has been placed on the ability of managers to differentiate their products and maintain competitive advantages. This may be achieved by developing an organizational climate that is responsive to change and supportive of new product initiatives. In his article, Des Thwaites draws on the established literature and a panel of informed opinion from the financial services sector to identify 12 characteristics of an organization that influence the effectiveness of the new product development process. United Kingdom building societies are examined to determine the emphasis given to these critical aspects of innovation. Three underlying factors, communication, people and mission, explain much of the variance among building societies. Five discrete groupings of firms are identified, and significant differences between their orientations are determined across a range of variables supporting new product development. While the empirical section of the study relates to a specific industrial sector, several issues and the recommendations transcend industry boundaries.
Appraisal‐Based Real Estate Returns under Alternative Market Regimes
Authors: Giaccotto Carmelo , Clapp John
Published: September 2003

In this article we use Monte Carlo simulation to study the statistical properties of real estate returns. We set up a model where transactions prices are noisy signals of true prices. We then consider a number of appraisal rules, derived from Bayesian and non‐Bayesian theory, to estimate the current true price and rate of return. The class of exponential smoothing and Kalman filter rules perform well at both the disaggregate (returns on an individual property) and aggregate (returns on a real property portfolio) levels. A special case of exponential smoothing (α= 1.0) places all weight on current market data. Since this case eliminates smoothing, our results suggest that appraisers should place all weight on current data (no weight on past data) provided that they want to estimate returns rather than values. However, these results should be used with caution if sales prices are very noisy.
Predicting Commercial Mortgage Foreclosure Experience
Authors: Vandell Kerry D.
Published: September 2003

This study has two objectives: (1) it directly evaluates the relationship between commercial mortgage default incidence and characteristics of the mortgage, borrower, property, market, and general economic conditions, and (2) it uses this relationship to predict the exposure of life insurers to future mortgage defaults and to examine the relative importance of various causes of current and past credit quality problems. A theoretical model of the default decision predicts that the decision would be expected to be driven primarily by the borrower's current equity stake in the property, or the ratio of the market value of the loan to property value (Mt/Vt), but that the presence and magnitude of transaction costs associated with default would be expected to result in underexercise of the default option. Empirical estimation making use of American Council of Life Insurance (ACLI) and National Council of Real Estate Investment Fiduciaries (NCREIF) data confirms both expectations. A high proportion of the longitudinal variation in foreclosure incidence is explained by variations in Mt/Vt, but even at high ratios Mt/Vt in excess of 1.1. only 5% to 8% of mortgagors default, although this magnitude of underexercise is probably overstated because of problems in measuring Mt and for other reasons. Simulations using the model provide a pessimistic outlook for future defaults. Default rates are predicted to double in the five‐year period 1988–93. Other simulations examine the relative importance of interest rate fluctuations, property value declines, and geographic or temporal correlations in lending during the 1976–88 period on current default experience.
Optimal Comparable Selection and Weighting in Real Property Valuation: An Extension
Authors: Gau George W. , Lai Tsong‐Yue , Wang Ko
Published: September 2003

Vandell (1991) recently developed a rigorous minimum variance technique for selecting and weighting comparables in real estate appraisal. This article extends Vandell's methodology in three areas: (1) an alternative objective function; (2) an approach that explicitly recognizes the non‐negativity constraint on comparable weights; and, (3) a more robust comparable inclusion process. Using Vandell's data, we show how our methodology modifies Vandell's results.
Real Estate Values, Federal Income Taxation, and the Importance of Local Market Conditions
Authors: Ling David C.
Published: September 2003

This article develops an income property valuation model that explicitly incorporates the effects of local market conditions. In particular, the model allows real rents to respond to a change in tax law, or to any exogenous shock to the system, with the dynamics of the rent change over time dependent upon current local supply and demand conditions and on the expected rate of economic growth in the local economy. Application of the model to an analysis of reduced capital gain taxation demonstrates that a partial reversal of TRA86's real estate provisions would disproportionately benefit those markets, and related lending institutions, which are most in need of a bolstering of real estate values.
Current Issues in the Analysis of Commercial Real Estate
Authors: Fisher Jeffrey D. , Webb R. Brian
Published: September 2003

This paper identifies and discusses a number of current issues regarding our understanding of commercial real estate markets. These issues include: 1) accurate estimation of the quantity and location of our nation's commercial space; 2) an understanding of the linkage between the space and capital markets for commercial real estate; 3) identification of the macroeconomic factors that affect the rate of return on commercial property and whether local market factors also affect the rate of return; 4) problems associated with measuring the return characteristics of equity investments in commercial property (including measures of the diversification benefits and inflation‐hedging abilities of this asset class); 5) a better understanding of rental markets, including good measures of changes in effective rents over time; and 6) examination of the rationale for ownership of commercial space by corporate users. This paper reviews recent research related to these questions and suggests future research that should prove to be fruitful.
Intrametropolitan Location and Office Market Dynamics
Authors: Clapp John , Pollakowski Henry O. , Lynford Lloyd
Published: September 2003

Theory and evidence point to interdependency between office location decisions and dynamic growth paths. For example, clerical and administrative support employees are suburbanizing relatively rapidly in most markets in response to changes in technology and transportation. This paper tests the hypothesis that both cross‐sectional and dynamic variables are important determinants of dynamic patterns and office market forecasts.

County Business Patterns data at the county and town levels indicate substantial spatial specialization (i.e., agglomeration) by type of office activity. But these agglomerations do shift over time, as indicated by the maintained hypothesis. Our econometric estimates suggest that the demand for office space in submarkets is responsive to agglomerations by type of industry as well as to growth in FIRE employment. The supply of office space is responsive to lagged expected demand.
Transactions‐Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?
Authors: Webb R. Brian , Miles Mike , Guilkey David
Published: September 2003

A transactions‐driven commercial real estate return series is generated in this study to determine whether the reliance on appraised values in the estimation of real estate returns is the source of the reported underpricing of real estate relative to stocks, bonds, and bills when analyzed in a traditional mean‐variance setting. The reported underpricing of commercial real estate would be rational if transactions‐driven returns exhibit more variance than appraisal‐driven returns. While we find that transactions‐driven real estate returns have greater variance than appraisal‐driven returns for individual properties, most of the individual property risk is idiosyncratic and diversified away at the portfolio level. Real estate continues to be a dominate asset class in mean‐variance allocation models even when represented with transactions‐driven indices.1
Biased Prediction of Housing Values
Authors: Knight J. R. , Hill R. Carter , Sirmans C. F.
Published: September 2003

This paper introduces the use of non‐sample, prior information to the problem of predicting prices of heterogeneous products. Using data from the 1983 American Housing Survey, the predictive performance of three Stein‐like empirical Bayes estimation rules are compared to the least squares estimator and the traditional biased estimation technique, ridge regression. The biased estimators improve upon the least squares mean square error of prediction risk under certain design‐related conditions. We provide evidence of this for the housing market in this paper.
Sell‐Offs of U.S. Real Estate: The Effect of Domestic versus Foreign Buyers on Shareholder Wealth
Authors: Myer F. C. Neil , He Ling T. , Webb James R.
Published: September 2003

Large foreign acquisitions of U.S. real estate always seem to generate considerable public concern. Most recently the reaction has been to Japanese purchases, but similar reactions occurred to Arab petro‐dollar purchases in the early 1970s. This study examines the impact of the buyer's nationality on the change in the wealth of the selling firm's shareholders for voluntary sell‐offs of U.S. real estate. In general, this study indicates that voluntary sell‐offs of real estate assets result in a significant increase in the wealth of the selling firm's shareholders. However, the change in the wealth of the selling firm's shareholders for U.S. buyers was not significantly different from that for non‐U.S. buyers. Since no advance is indicated for foreign buyers over domestic buyers, laws or regulations hindering the foreign acquisition of U.S. real estate cannot be supported. The assumption of a “non‐level playing field” for U.S. real estate investors who bid against foreign firms for U.S. real estate assets is not confirmed.
Seasonal Variation in Cost‐of‐Funds at Thrift Institutions
Authors: Nothaft Frank E. , Wang George H. K.
Published: September 2003

The purpose of this note is threefold. First, in addition to the well‐known seasonal pattern to the eleventh‐district cost‐of‐funds (COF), we document a twelve‐month seasonal in the national median COF. Second, we demonstrate that the cause of seasonality in each of these COF series is due to the maladjustment of length‐of‐month effects. In particular, the eleventh‐district COF is biased upwards in relatively short months while the national median is biased downward. Third, we show that the popular partial adjustment model for modeling the COF is misspecified.
Leasing as a Lottery: Implications for Rational Building Surges and Increasing Vacancies
Authors: Gyourko Joseph , Voith Richard
Published: September 2003

An expanded inventory demand framework is developed that focuses on the impacts of changes in the local leasing environment. We model the lease‐up process as a lottery in which changes in turnover or absorption affect the probability of winning the leasing lottery. In this context, builders rationally respond to transitory, not just permanent, changes in the local market. Hence, factors such as temporary shocks to tenant turnover affect the decision to build. The magnitude of turnover‐induced cycles can vary across markets depending upon the vintage of the existing building stock, the local absorption rate and the rent elasticity of demand for space. This framework, which refocuses attention on the local determinants of the developer's decision to build, hopefully will prove fruitful in future empirical efforts to explain development and vacancy behavior during the past decade.
Inflation Risk, Payment Tilt, and the Design of Partially Indexed Affordable Mortgages
Authors: Scott William H. , Houston Arthur L. , Do A. Quang
Published: September 2003

This paper integrates two fundamentally important parameters into a theory of optimal mortgage design: the proportion of inflation risk borne by the lender / investor and the borrower and the amortization‐graduation schedule for loan repayments. Equations are derived for a family of innovative mortgages, termed hybrid PLAMs, which offer advantages to borrowers and lenders over either the standard fixed rate mortgage (FRM) or the price level adjusted mortgage (PLAM). The superiority of the hybrid PLAMs lies in their ability to simultaneously and independently accommodate differing degrees of inflation‐risk sharing and payment affordability. Inflation‐risk sharing is represented by an indexation parameter set over a continuum of values such that the FRM has zero index variability and the PLAM has unit index variability. Similarly, payment tilt is represented by a tilt parameter such that the FRM has zero tilt and the PLAM has unit tilt. We demonstrate that these two parameters are independent and can each be continuously varied in a two‐dimensional family of self‐amortizing mortgages. A specific hybrid PLAM can be designed to partition inflation risk in any proportion between the borrower and the lender and to simultaneously prescribe any level of payment tilt between the extremes of the FRM and PLAM. The behavior of representative hybrid PLAMs is simulated and compared to FRMs and PLAMs for three different inflation scenarios, one of which uses actual market data from the period of 1960–1990.
The Impact of Natural Hazards on Housing Values: The Loma Prieta Earthquake
Authors: Murdoch James C. , Singh Harinder , Thayer Mark
Published: September 2003

A large, detailed data set is used to examine the effect of the Loma Prieta (World Series) earthquake on housing prices in the San Francisco Bay area. This relationship is examined while controlling for potential confounding variables, such as location‐specific risk and the timing of the earthquake. The results indicate that the Loma Prieta earthquake caused an area wide reduction in property values. In addition, it seems that individuals considered other measures of earthquake risk in their housing purchases, yielding a measurable price gradient. These results are relatively robust, remaining stable across estimated functional forms and independent variable sets.
Dividend Policies and Dividend Announcement Effects for Real Estate Investment Trusts
Authors: Wang Ko , Erickson John , Gau George W.
Published: September 2003

Previous research on real estate investment trusts (REITs) assumes that their dividend policies are determined solely by tax regulations. We observe, however, that REITs often pay out more dividends than are required by tax rules. This paper examines the dividend policies of REITs by drawing inferences from agency‐cost theory and tests for the determinants of REIT dividend payout ratios. The study also considers whether the stock market responds differently to the dividend announcement effects of equity and mortgage REITs based on asymmetric information. Our results support agency‐cost explanations for dividend policy and suggest a differential announcement effect.
Handing Over the Keys: A Perspective on Mortgage Default Research
Authors: Vandell Kerry D.
Published: September 2003

This paper is the text of the 1992 Presidential Address for the American Real Estate and Urban Economics Association. A comparative evaluation of mortgage default research finds that both the residential and commercial markets evolved from informal underwriting rules, to formalized (though unvalidated) ratios and rules of thumb, to early risk ratings based upon empirical evidence, to gener‐alizable econometric models of default, to option‐based pricing models. The commercial market lagged the residential market by about 10 to 20 years at first but is now only about five years behind. The survey finds that research and progress in understanding mortgage credit risk has been precipitated by a public policy need or mandate, data availability, and adequate technology. The absence of any one of these factors has hindered progress in the past. Finally, six emerging issues in default research are identified and discussed: (1) the degree of “ruth‐lessness” with which default is exercised, (2) loan recourse, (3) the magnitude and timing of revenues and losses associated with default, (4) loan modification, (5) default in a portfolio context, and (6) leasehold default. Progress in these areas will enhance the efficiency of both the residential and commercial markets.
Commercial Mortgage Pricing with Unobservable Borrower Default Costs
Authors: Riddiough Timothy J. , Thompson Howard E.
Published: September 2003

This paper develops a pricing model for commercial real estate mortgage debt that recognizes the influence of default transaction costs on the borrower's default decision. These costs are heterogeneous across borrowers and largely un‐observable to the lender/investor at the time of origination or loan purchase. A recognition of these unobservable costs can explain why borrower default decisions may differ from those predicted by “ruthless” mortgage‐default pricing models. We address the determinants of default choice and timing by replacing sharp default boundaries found in the ruthless models with “fuzzy” boundaries that account for investor uncertainty with respect to evaluating borrower default decisions. To implement our model, we estimate probabilities of default as a junction of time and net equity in the property. Then, given that default occurs, loss severities are modeled based on expected property value recovery net of foreclosure costs and time until the asset is actually sold. Under reasonable parameter value choices, resulting Monte Carlo simulations produce numerical mortgage price estimates as well as component default frequency and severity levels that realistically reflect default premiums and loss levels observed in the marketplace.
Explaining Refinancing Decisions Using Microdata
Authors: Dickinson Amy , Heuson Andrea J.
Published: September 2003

This paper develops a model which explains how mortgage‐rate movements, transactions costs, changes in borrower income and house value, personal financial opportunities and the prepayment option embedded in fixed‐rate mortgages affect a financially flexible borrower's decision to refinance an existing loan while retaining the underlying home. Broadening the focus of previous analytical work, the model explains why households with similar mortgage loans may react differently as financial market conditions change. It contains definitive empirical predictions that are supported by an analysis of a choice‐based sample of individual loan transactions. Results suggest that refinancings are motivated both by movements in the level of interest rates and by borrowers' desires to alter their capital structures in the face of changing income and housing wealth.
Loan Loss Severity and Optimal Mortgage Default
Authors: Lekkas Vassilis , Quigley John M. , Van Order Robert
Published: September 2003

This paper tests the contingent claims model of mortgage default in its ruthless or frictionless form. The principal tests of the model are based on an unconventional source of data, namely, loan loss severities on defaulted mortgages. The frictionless model has well‐defined predictions about loss severities which we test in detail. The data analyzed include a random sample of all mortgages originated during the period 1975–90 and purchased by Freddie Mac, as well as the loss severities on all mortgages purchased by Freddie Mac which defaulted during the period. The frictionless model does not do well in these tests.