Assessing risk and value creation of public and private timberland investments
Cascio, Anthony Joseph
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This dissertation assesses elements of the financial risk and return of timberland investments within the United States by applying modern portfolio theory, the capital asset pricing model and the efficient markets hypothesis. The first study applies modern portfolio theory to assist in the optimal construction of portfolios of sub-regional timberland assets within the US South. First, we develop a unique set of synthetic timberland returns for 22 sub-US South regions, for a 19 year time horizon. Portfolio optimization is performed with these 22 return series, and an efficient frontier identified with portfolios having risk levels ranging from 3.9% to 13.8%, and expected return levels of 10.4% to 13.4%. The optimal tangency portfolio is identified having expected return and risk levels of 11.2% and 4.2%, respectively. Monte Carlo simulation is utilized to estimate the value at risk (VAR) of a hypothetical ten year, regionally-diversified timberland investment. The second study estimates the systematic risks and risk-adjusted required returns of timberland investments in different geographic regions within United States using the Capital Asset Pricing Model (CAPM). We estimate low, positive betas for timberland in the Pacific Northwest, Northeast and South. These estimates are not significantly different than zero, but are however higher than many past estimates from earlier time periods. Required return rates of 5.7%-6.6% are estimated for the three regions, respectively. From 1995 to 2002, nine mergers and acquisitions of publicly-held, vertically-integrated forest products companies occurred in the United States. Investors not able to directly own timberland may choose to own shares of these firms as a method of indirect timberland investment. The third study employs event study methodology, based on the concept of market efficiency, to test the null hypothesis of no shareholder value creation from these mergers and acquisitions. We find that $4.7B of market value was created upon the announcement of these nine combinations. We find that target firms enjoyed a statistically significant, nearly 15% average return attributable to the merger announcements. The returns to acquiring firms averaged a statistically insignificant 0.34%. The aggregate return was a statistically significant 7.66%.