Working Paper: NBER ID: w16060
Authors: Thomas Chaney; David Sraer; David Thesmar
Abstract: What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. Over the 1993-2007 period, the representative U.S. corporation invests 6 cents out of each additional dollar of collateral. To compute this sensitivity, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. We address the endogeneity of local real estate prices using the interaction of interest rates and local constraints on land supply as an instrument. We address the endogeneity of the decision to own land (1) by controlling for observable determinants of ownership and (2) by looking at the investment behavior of firms before and after they acquire land. The sensitivity of investment to collateral value is stronger the more likely a firm is to be credit constrained.
Keywords: Collateral; Corporate Investment; Real Estate; Financing Frictions
JEL Codes: E44; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in interest rates (E43) | Increase in demand for real estate (R21) |
| Firms acquiring real estate (L85) | Sensitivity of investment to collateral value (G11) |
| Pre-acquisition investment behavior (G31) | Non-owners' investment behavior (G40) |
| Real estate prices (R31) | Corporate investment (G31) |
| Collateral value (G32) | Corporate investment (G31) |