 Do Real Estate Values Affect Corporate Capital Structure and Investment? Test of Collateral Channel in an Emerging CountryZeynep Onder and Dil Ayberk ERES from European Real Estate Society (ERES) Abstract: When house prices increase, the collateral value of bank loans that companies and households can get increases. It is known that collaterals are one of the factors that determine the capital structure of companies (for example, see Rampini and Viswanathan, 2010). In addition, the increase in the value of the collateral will reduce the agency problem between the lenders and the investors. It will cause the investments of the companies to increase (Fougere, Lecat, and Ray, 2019). Although these relations, which are called collateral channels in the literature (Bernanke and Gertler, 1989; Kiyotaki and Moore, 1997), have been shown in developed countries during the periods when house prices rise and fall, there is not much evidence in developing counties, except China (for example, Chen et al., 2015; Deng et al., 2018). However, due to the diversity of the housing market in China and the large number of state-owned enterprises, the evidence from this country may not be generalized to other developing countries. In this study, we aim to contribute to the literature by examining how the capital structure and investments of companies in Turkey change with the change in the real estate values for the period 2010-2022 when real house prices did not change and increased considerably. Several studies have shown that shocks to real estate value have significant effects on employment and investments. For example, Chaney, Sraer, and Thesmar (2012) reported that when collateral values increased by $1 during the period 1993-2007, publicly traded US firms increased their investments by $0.06. Using administrative data, they also show that the effect of collateral on the investment of French companies was greater than that for the US firms. They explained the difference by the fact that French firms are more financially constrained. Similarly, Bahaj, Foulis, and Pinter (2020) estimated that a 1 pound increase in the prices of houses owned by company directors in the UK increased the companies’ investments by 0.03 pounds. Fougere, Lecat, and Ray (2019) reported that the effect of the change in real estate values on firms’ investments depends on their real estate holdings and found that a 10 percent increase in real estate prices causes a 1% decrease in vestment rates of companies with less holdings while it increases investments of companies with highest holdings by 6%. They also stated that the increase in collateral values had a positive effect on total productivity. Since the firms are generally more financially constrained in emerging economies, the effect of the value of real estate is expected to have significant effects on investments. Some studies examine the impact of the changes in real estate values on capital structure. For example, Gan (2007) found that companies that owned real estate were affected by the bursting of the real estate bubble in Japan in the 1990s and had difficulty maintaining their relationships with their banks and were able to get fewer bank loans. Campello et al. (2022) showed that after the increase in real estate values, US firms took more debt, but instead of secured debt, they got unsecured debt. Cvijanovic (2014) found that a one standard deviation increase in real estate values caused the company’s debt ratio to increase by 3% because of the decline in borrowing cost or getting loans under more favorable conditions. Similarly, Lin (2016) reported that a one standard deviation increase in the collateral value of companies caused the bank loans-to-total debt ratio to increase by 6%. By investigating the capital structure of companies from several countries, including Hungary, the Netherlands, Norway, Sweden, and Turkey, Yesiltas (2015) showed that the capital structures of companies with high collateral value are more affected by the shock in loan-to-value ratio than companies with low collateral value. Among the emerging economies, we are only aware of studies of China. For example, Chen et al. (2015) examined the period 2000-2007 and showed that companies increased their private borrowing with the increase in house prices but the capital structure of the public companies is not affected because they do not have any credit restrictions. Wang, et al. (2017) examined how Chinese companies’ investments were affected by the change in house values in the period 2005-2014. They reported an inverse relationship between house prices and investments in non-public private companies. In Turkey, as in other developing countries, financing options for companies, especially small and medium-sized enterprises (SMEs), are quite limited. The financing obtained through bank loans and the collateral channel that is as a result of the increase in real estate prices will be a very important source of financing for the companies. It is expected that the change in house values will have positive effects on both borrowing and investments of companies, especially SMEs in Turkey. The housing and credit markets in Turkey experienced extreme growth rates during the second half of the sample period. According to IMF statistics, real house values increased the most in the world in 2021 in Turkey (26.89%). In the same period, the average increase was 3.75% in developing countries. Although this increase reduces the housing affordability of households, we expect that this increase will have a positive effect on firms’ bank borrowing and level of investments, especially for SMEs that are more likely to be credit-constrained. The major problem in the analysis is the identification. This problem tries to be solved by using housing supply elasticity and the non-developable area ratio at the province level as instrumental variables, following Saiz (2010). Changes in house prices will be analyzed on a provincial basis using REIDIN data and for NUTS2 regions using CBRT data. The hypotheses will be tested separately in periods when house prices increase and when they do not change much. The financial data of the enterprises on a provincial basis are obtained from the Entrepreneur Information System (GBS) database maintained by The Ministry of Industry and Technology. As empirical models, we follow the literature and employ the model developed by Cvijanovic (2014) to investigate how the debt ratios of firms change by the increase in house value and the one developed by Fougere et al. (2019) to examine the effect of the changes in house values on investments of firms. The initial findings indicate that even though the large firms do not significantly change their capital structure or investments, micro and small firms increase their debt ratios and investments with the increase in real estate values in the period 2010-2022. Keywords: Collateral Channel; Debt Ratio; House Values; Investments (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2025_273 Access Statistics for this paper More papers in ERES from European Real Estate Society (ERES) Contact information at EDIRC. |
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