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Real Estate Prices and Firm Capital Structure

Author

Listed:
  • Dragana Cvijanovic

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, LSE - London School of Economics and Political Science)

Abstract

This paper examines the impact of real estate prices on fi rm capital structure decisions. I find that for a typical US listed company, a one percent increase in collateral value translates into a 0.12 percent increase in total leverage. My identi cation strategy employs a triple interaction of MSA level land supply elasticity, aggregate real estate price changes and a measure of a firm's real estate holdings as an exogenous source of variation in the value of fi rm collateral. I fi nd that for every one percent increase in collateral value, a fi rm's annualized cost of long-term debt drops by four basis points. More financially constrained fi rms tilt their debt structure towards arm's length fi nancing, less information sensitive debt and longer-term debt maturities in response to collateral value appreciation. These results indicate the importance of collateral values in mitigating potential informational imperfections. More financially constrained fi rms use collateral-induced borrowing proceeds for financing new investment and for equity payouts.

Suggested Citation

  • Dragana Cvijanovic, 2012. "Real Estate Prices and Firm Capital Structure," Working Papers hal-00686121, HAL.
    • Handle: RePEc:hal:wpaper:hal-00686121
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    Cited by:

    1. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2015. "House prices, collateral, and self-employment," Journal of Financial Economics, Elsevier, vol. 117(2), pages 288-306.

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