Heterogeneous Impact of Real Estate Prices on Firm Investment

Focusing on real estate and other fixed tangible assets, we study how the heterogeneous effects of real estate prices influence real estate investment behavior. Theoretically, expectations of declining real estate prices reduce not only overall fixed tangible investment through a collateral channel but also real estate investment through intertemporal substitution of demand. By employing a unique dataset on firms' land transactions and overall investment in Japan during the period 1997-2006, we examine these predictions and find the following. First, the entire fixed tangible asset investment is positively associated with the growth rate of land prices, which is the evidence for the collateral channel. In contrast, land investment has no statistically significant relationships with land price growth. Second, a decomposition of land investment into land purchases and sales shows that land sales actually decrease when the growth rate of land prices falls. Third, large firms and firms that acquired land during and shortly after the bubble period tend to reduce land sales. This is consistent with Geltner's (2014) argument that potential sellers of land set their reservation prices at their purchase prices and are reluctant to sell land in the face of a persistent drop in its price.